Stocks still vehicle of choice for long-term investors

By Russ Wiles
The Arizona Republic

You and the market. What to do?

In three short years, investors who had come to expect double-digit gains as an inalienable right watched as a good chunk of their wealth simply vanished.

Last year, stocks suffered their biggest drop in a generation, and many threw in the towel. But the risk-averse barely tread water, as yields on bank accounts ebbed to four-decade lows.

Anybody who regularly earns more than they spend eventually will face an investing decision, and the case for jumping in, and staying in, the market remains strong.

Karoline Cullen and David Maher, for example, have big plans. The couple, planning a May wedding, are buying a house, and they want to visit Japan and Europe in the next few years. They also want to build up their emergency reserves, plan for retirement and achieve other financial goals.

To get the job done, they're putting money aside in various vehicles, from ultrasafe bank accounts to stock mutual funds.

"I'm putting more money into the (stock) market right now than before," said Maher, 30, a pharmaceutical sales representative who lives in Tempe, Ariz. "My father, who's close to 70, has done nothing but benefit from the investments he has made."

Finding direction

As the economy meanders, investors seem to have lost direction as well. Confusion and paralysis have replaced confidence. Participants in 401(k) plans have pared back contributions to stocks, and investors withdrew more cash from stock mutual funds last year than they put in, for the first time since 1988.

But they haven't bailed out en masse. Participation in the stock market remains at near-record levels, with roughly half of all households having a foot in the door.

After three straight years of falling prices, it's harder to find such true believers in the stock market as Maher.

The old mantra of "buying on dips," which worked so well in the 1990s, has been rendered at least temporarily obsolete by the numbing losses.

"Many people didn't realize their risk tolerance until they felt the pain personally," said Laura Lee Wagner, a senior financial adviser at American Express in Phoenix.

But the stock market always has recovered from past swoons, and millions of people who stayed the course over the years have prospered. Stocks offer one of the easiest, most direct ways to tap into U.S. and world economic growth.

Stocks have soundly beaten alternatives such as bonds and Treasury bills when given enough time. And they have stayed well ahead of inflation.

But this growth has come at a cost, as investors must accept the risk. Stock prices aren't stable, which explains why it is important to stay committed for at least a few years, if not longer.

"When clients think they will need a substantial amount of money within the next two or three years, I won't let them go into stocks," said Grace Lau, president of PacWest Financial Management in Phoenix.

Saving vs. investing

People who get into the habit of saving compile the raw materials from which they can build investment portfolios, but it's important to distinguish between saving vehicles and investments.

Conservative instruments such as certificates of deposit and money-market funds usually yield only enough to keep pace with inflation. If you factor in the taxes most people must pay on saving instruments, they can wind up as net losers.

Most speculators, meanwhile, are hoping for big short-term gains while accepting the possibility of numbing losses. People who buy only a few stocks on little more than a tip often are guilty of speculating, which is akin to casino gambling.

A person's response to loss, known as risk tolerance, plays a role in determining whether he or she should invest. Psychological studies have reported that people generally lament losses more than they enjoy gains, but attitudes vary widely. If you can't stand heat, you probably shouldn't be in the stock-market kitchen.

Then there's the question of what you hope to accomplish with your money. A common goal of risk-averse savers is to meet short-term or predictable expenses such as a car down payment or vacation.

In contrast, retirement planning, a fairly distant hurdle for most people, is the common goal among stock investors. People investing for retirement typically have enough time to ride out storms.

A typical retired couple collecting Social Security benefits in 2003 will receive about $17,800, which won't provide for many golf outings or fancy restaurant meals. Future Social Security recipients might not even fare this well, after adjusting for inflation.

"People seem to have grown more optimistic Social Security will be there for them," Wagner said. "But nobody thinks this alone will be enough."

In short, investors are united by a willingness to forsake some consumption today in hopes of building a better tomorrow.

"People know that if they totally go into bonds or cash now," Lau said, "they give up any opportunity to make up their losses."