After the recession, several traditional modes of thinking about investing have changed. Below are five examples that investors can learn from:
1. Asset Allocation
CONVENTIONAL WISDOM: Traditional thinking says mixing stocks and bonds in a portfolio should be done according to an investor’s age and risk tolerance. Hence, young investors were encouraged to own growth stocks before transitioning into the more secure bonds and blue-chip company investments.
NEW THINKING: Bonds are the way to go. Barclays Capital U.S. Aggregate Bond Index indicates a 14% increase in bonds since 2007 October, while stocks dipped 28%. This is why investors have poured in $209 billion into bond mutual funds compared to the 200% more attractive stock funds before.
2. Stock diversification
CONVENTIONAL WISDOM: Maintaining a diversified portfolio will arm you in bear markets and assure the best returns. In the event of a downturn, rely on “value” stocks, while during the good times, maximize your gains by investing in “growth” stocks.
NEW THINKING: The fact remains that it will take several years before a full economic recovery. Experts predict more volatility and an unsteady recovery, instead of a consistent climb upward. It depends on what kind of economy emerges after the downturn.
3. Alternative Investments
CONVENTIONAL WISDOM: Build your portfolio around stocks and bonds and minimize investing in other assets.
NEW THINKING: Tangible assets like real estate and gold are the more secure option. Consider not only your home, but other forms of real estate and gold bullion.
4. Dividends
CONVENTIONAL WISDOM: Dividend-paying stocks assure you steady income.
NEW THINKING: This is no longer a certainty after companies made several dividend cuts to conserve cash. The only thing still certain is taxes.
5. Risk
CONVENTIONAL WISDOM: Choose risk-free investments to protect yourself.
NEW THINKING: Nothing is risk-free anymore. Large money-market mutual funds like the Reserve Primary Fund have proven to be vulnerable to the financial crisis.
