Mindful of how many poets and poetry lovers plead financial ignorance and sometimes even boast of their ineptness when it comes to managing their own money, we recently spoke to two of the last sane brokers on Wall Street -- the duo who told us not to panic during that terrifying seven-month period when Lehman went under in September 2008, the US economy went into intensive scare, and the stock market tumbled to decade-long lows in March 2009. Their advice at the time: hold your stocks, wait for the rebound, and then gingerly start buying some ultra-safe blue-chip issues as the warm weather settles in. Anyone who did as advised, simply holding firm, selling nothing and perhaps accumulating some Procter and Gamble, Microsoft, IBM, Coca-Cola, knows how brilliantly that advice has worked. But now, in 2010, everyone is uncertain -- and there's nothing a jittery investor likes less than uncertainty. The experts are divided between the wall of worriers who think we're in for a major correction, with stock values decreasing by a depressing 10 to 25%, and the hardy climbers, perennial bulls, who forecast a sustained recovery from this ugly punishing jobless recovery. So what should we do? Our dynamic duo asks us not to identify them by name or firm, citing federal regulations. Here's what they say:
You have to assume the Fed will raise rates at some point -- but not too soon. Bernanke, a student of the great depression, is fearful of dampening an economic recovery that is sluggish at best, so the rates will likely remain at historical lows until the end of summer. For the individual investor this means that money market yields are getting you exactly zero. Money stashed in an old-fashioned saving account is a good alternative for rainy day funds (i.e. emergency money), even though you barely get 1%. So where should you park your investment money -- what we like to call your "core" account? A good short-term investment grade bond fund, with a low expense ratio, like Vanguard's, probably makes the most sense.
But interest rate hikes are inevitable, and an appealing alternative to bonds (whose value goes down as interest rates go up) is dividend-paying high quality stocks. Although a "flight to quality" usually coincides with a steep loss of investor confidence, that money has gone so far to gold while bolder speculators have been testing the commodity, currency, and international equity markets. Which means that you can buy champion stocks like Exxon-Mobil and Johnson and Johnson at reasonable valuations and count on dividends to give you an excellent total return especially if you plan to hold them for a couple of years. At current valuations we also like Cisco and Intel and the rails as momentum plays. Utilities, with their high dividends, are traditional havens for cautious investors, and you might look at Con Edison (5.6%), Duke Energy (6.1%), Exelon (4.4%). Republic Services at $28 a share, and a dividend of 2.7%, is worth a shot, if only because it's a well-run company and the waste management business generates great cash-flow. Barron's is bullish on Pepsi, Monsanto, Dow Chemical, FedEx, and Abbott Laboratories.
If you have made money on American Express, which just capped a fantastic year, please remember the old adage: Wall Street likes bulls and bears, but sooner or later pigs get slaughtered. Consider taking some money off the table. Of the thirty stocks that make up Dow-Jones Industrial Average, we think GE will gain the most this year. When Berkshire-Hathaway's B shares split fifty to one, you might pick up a hundred and ride with the oracle of Omaha, Warren Buffet.
Thank you, guys. I would add only that Time's cover story on "man of the year" Benjamin Shalom Bernanke is excellent and that the perfect music for this season of financial uncertainty and bitter cold weather is Ella Fitzgerald's live performances of "On the Sunny Side of the Street" and "Accentuate the Positive" with great piano accompaniment back to back. Defines swing. Twelve Nights in Hollywood. Paul Smith and Tommy Flanagan were her pianists.