An article in last week's issue really resonated with me because, for once, the speaker who was quoted seemed to have no truck with the oft-repeated assertion that diversification makes stocks safe investments over time.
We have been fed this line almost as gospel, especially in the last decade. And if the success of the mutual fund business in accumulating trillions of dollars is any indication, the message has worked. That message–that equities are absolutely essential to the health of your portfolio–has rarely been challenged.
Yet here was Zvi Bodie, professor-finance and economics, Boston University School of Management, pretty much pooh-poohing that idea. It's "complete baloney to say stocks become safe in the long run due to time and diversification," he said. "History proves that the ups and downs of the market do not cancel out over time."
Stocks "would not have a risk premium" if they become safe over time, he maintained at an industry retirement conference held last month in (where else but) Las Vegas. Linda Koco attended and wrote the story based on a session examining new retirement paradigms that are emerging.
I think a lot of the public that have migrated to equities over the last decade or two, particularly through mutual funds, recognize the validity on a gut level of that Bodie was making.
All we've heard is that equities are supposed to be good for us, but that doesn't mean we've come to love them–or trust them–for that matter.
What it reminds me of is this: I have a cat who needs to get liquid medicine twice a day to help with his internal plumbing problems. No matter how many times my wife and I have tried to convince Chet that he needs the medicine and that it does him good, it doesn't work. He still tries to spit it out or avoid it every time.
Much as people have been told how they need to take their medicine, i.e., stay the course when the market is tanking, they still sell low and buy high. And they regret while surveying their portfolio's wreckage.
