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Economic meltdown rewriting rules of investment

Retired investor Elaine Mobley, 75, outside her home, subscribes to the Wall Street Journal to keep up with money matters. Mobley lives off her investments and has lost two-thirds of her annual income from poor stock performance. (Associated Press / The Spokesman-Review)
Retired investor Elaine Mobley, 75, outside her home, subscribes to the Wall Street Journal to keep up with money matters. Mobley lives off her investments and has lost two-thirds of her annual income from poor stock performance. (Associated Press / The Spokesman-Review)

BOSTON – Stocks always rise over the long haul. Bonds are for retirees and investors with little taste for risk. Companies rarely cut their dividends.

Those are three of the long-followed rules of investing – and rules that, as investors learned during a year of the stock market’s worst turmoil since the Depression, can’t always be counted on.

Not even blue chips like Dow Chemical and General Electric were safe when everything seemed to be crashing.

At their lowest points over the past year, each stock could be purchased for less than the price of lunch at McDonald’s. And each company slashed its sacred dividend – Dow for the first time in 97 years, GE for the first time in 71 years.

As the meltdown helped take out half the stock market’s value from its peak, investors and advisers began to question the time-honored strategies of the longest investing binge in American history, dating to the start of a bull market in 1982.

A historic rally over the past six months has restored some wealth and given everyone time to think about what went wrong and what can go right again. What’s emerging is not so much rejection of old ideas but an effort to adjust them to fit a more unpredictable market.

Here are five examples of how the year after the meltdown has changed the old thinking about investing:

Asset allocation

•Conventional wisdom: Younger investors once were advised to own more growth stocks, then transition as they aged into more shares of well-established, blue-chip companies and into bonds, which return less but are less risky. Stocks were expected to beat bonds handily over the long haul.

•New thinking: A broad measure of the bond market, the Barclays Capital U.S. Aggregate Bond Index, is up nearly 14 percent since October 2007. That compares with a 28 percent decline for the Standard & Poor’s 500 stock index.

Going back five years, bonds still win. They’ve returned an average 5 percent a year versus just 1 percent for the S&P 500. And the last 10 years have been a lost decade for stocks. They’ve had an average annual loss of 0.5 percent compared with an annual gain of 6.2 percent for bonds.

You have to measure back 20 years to find a long-term edge for stocks, and even then it’s small.

Stock diversification

•Conventional wisdom: In downturns, count heavily on “value” stocks – those considered cheap compared with historically steady earnings. To take advantage of good times, own more volatile “growth” stocks – those expected to have rapidly growing earnings.

•New thinking: The dramatic stock rally since March suggests a slowdown is inevitable and that it’s time to move more into value stocks. But a robust economic rebound could reignite the rally, meaning growth stocks would provide the best chance for big returns. It all depends on what type of economy emerges.

Alternative investments

•Conventional wisdom: Keep stocks and bonds as the foundation of your portfolio and put minimal amounts in other types of assets.

•New thinking: Put more of your retirement nest egg in tangible assets. Think not only about your home but also about other kinds of real estate, as well as gold bullion.

Dividends

•Conventional wisdom: Stocks that pay dividends ensure you a steady stream of income.

•New thinking: So far this year, companies have cut dividends at a record pace. During the five decades before last fall’s meltdown, about 15 companies increased their dividends for every one that cut, according to S&P. So far this year, dividend cuts are running ahead of increases. Companies cut dividends because they need to conserve cash. And once a company cuts, it often doesn’t restore its dividend to its previous level until it’s confident it can afford to give up the cash. And that can take years.

Elaine Durham Mobley, a widow and retired bank accountant, used to receive $5,161 in dividend checks every three months from Bank of America and General Electric. Those checks now total $682. About a third of her $64,000 in annual income has vanished.

“I always thought these dividend stocks were quite safe,” says Mobley, 75, of Sautee Nacoochee in the mountains of northern Georgia. “But we have to remember the law: There’s nothing sure in life but taxes and death.”

Risk

•Conventional wisdom: Some investments are risk-free. You can put money in them and not worry whether it’s safe.

•New thinking: There is no such thing as risk-free.