Investors measure risk, reward

By Russ Wiles
The Arizona Republic

The stock market party has been over for three years, but janitorial crews are still trying to clean up the mess.

Stocks in 2002 completed a rare third straight down year, and 2003 is off to a poor start. Investors hate uncertainty, but that's what they're getting in spades with the Iraq situation, unsteady company profits and distrust of corporate America.

Prices also aren't cheap when measured by traditional yardsticks, and no clear trend has emerged from the on-again, off-again economic recovery.

It's enough to cause millions of Americans to rethink the role of stocks in their future, but so far most investors have held steady.

"Even after three years of down markets, about 80 percent of participants in (401(k)-style) plans haven't changed their investment allocations," said Dallas Salisbury of the Employee Benefit Research Institute in Washington.

Is sticking with the market justified? Yes, for people taking a long-term view, many financial planners say.

Although the chances are only about 50-50 that stocks will rise any day, the odds improve to 70 percent in a given year, reports researcher Ibbotson Associates of Chicago. When tracked over rolling five-year periods, stocks have risen 89 percent of the time. Over 15-year spans, the record is 100 percent.

There's no guarantee the pattern will continue, but the past often indicates what's to come. Stocks have gained substantially over the decades because of long-term economic growth, despite various swoons along the way.

Yet buy-and-hold has come under attack from advocates of market timing. The idea here is to switch out of stocks during down trends and get back in when the outlook improves.

But market timing also means a risk of getting whipsawed. Academic studies generally have not supported timing over buy-and-hold investing, partly because of added costs from trading more frequently.

The dilemma boils down to which risk you find more worrisome: getting caught in a slump or missing a powerful rally.

Another emerging trend has been new enthusiasm for dividends. In decades past, it was common to find stocks paying higher yields than bonds paid in interest, as companies offered hefty dividends to lure wary investors.

In 1950, for example, stock dividends averaged nearly 9 percent, while long-term government bonds paid 2 percent.

But things began to change. Investors grew comfortable with lower stock yields while demanding higher payments on bonds. Federal tax policies also played a role, giving corporations a subsidy on their bond interest payments but not on dividends.

By 2000 and 2001, dividend yields had fallen to record lows near 1 percent. The pendulum has started to swing back, with yields rising to about 2 percent.

Now comes President Bush's plan to eliminate taxes for investors on dividends.

Lynn Yturri, portfolio manager of the One Group Equity Income Fund, says he thinks some tax break is in the cards.

"It's a reason to think positively about stocks," he said..

Many investors continue to do just that. But they're taking a harder look at the risk-and-reward trade-offs than they did a few years ago, when the party was in full swing.