Equities: Still Your Best Bet for Retirement

by Marc Bastow | November 20, 2012 11:15 am

Investors had to have been thankful for Monday’s joyous respite from weeks of stock-punting, but many of us — particularly those slowly piecing together a portfolio to carry them into retirement — likely would have admitted to getting a little bit worried there.

After all, that’s what we’ve been conditioned to do. 2008 put a scare into investors we’ll not soon forget, so what few of us are left in the markets are timid creatures just waiting to bolt … right?

Well, The New York Times’ Russell Pearlman might argue otherwise[1].

Amid a slew of evidence showing we’ve “given up on stocks” — low trading volume, $440 billion exiting mutual funds since the start of 2008 — Pearlman points out a couple very big numbers that show we’re still in the game:

  1. $5.7 trillion: That’s the total money in stock mutual funds, which tops the total invested in bond and money market funds combined, according to the Investment Company Institute.
  2. $880 billion: The amount invested in “stock-centric exchange-traded funds.”

Sure, hedge funds and financials’ holdings account for the lion’s share of that, but not all — individual investors still believe in the stock market to some extent, and importantly, believe in it more than other avenues of growth.

After all, where else are investors going to go for income? If the choice is between a utility-esque telecom like AT&T (NYSE:T[2]) yielding more than 5%, or CD and Treasury rates below 2%, I’m picking AT&T — the slight risks T shares pose doesn’t nearly outweigh their income and growth potential.

Concerned over a possible dividend tax hike? Honestly, you have every reason to be — it appears almost an inevitability[3] — but it isn’t a reason to abandon dividend-paying stocks altogether. Not yet at least.

It’s a little muddled as to how companies may respond to the tax changes; some think more money might go into stock buybacks to “save” shareholders from increased tax bills; but in all likelihood, dividend payments and increases will continue, even if not as briskly as before.

And again — stocks provide the additional opportunity for appreciation over time. Yes, it can go the other way, but historically, stocks have returned better than bonds. In other words, don’t be spooked by pullbacks — use them as opportunities to find bargains in blue-chip stalwarts like Coca-Cola (NYSE:KO[4]) or McDonald’s (NYSE:MCD[5]), even if you buy just a little at a time. (It’s called dollar cost averaging, and it’s an outstanding long-term investment technique.)

If you’re scared of picking funds on your own, you can mitigate risk by buying exchange-traded funds, which bundle several stocks into a single “unit.” If income is your goal, look to dividend-specific ETFs like the iShares Dow Jones Select Dividend ETF (NYSE:DVY[6]) or sector-specific funds like the iShares Dow Jones U.S. Utilities Fund (NYSE:IDU[7]) — both examples currently yield 3.6%.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. might argue otherwise: http://www.nytimes.com/2012/11/14/your-money/many-still-consider-stocks-the-best-investment-option.html?adxnnl=1&adxnnlx=1353336556-ugbeacWbhNknpQn2s+GKsA&_r=0
  2. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  3. it appears almost an inevitability: https://investorplace.com/2012/11/dividend-investors-dont-panic-tax-rate/
  4. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  5. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  6. DVY: http://studio-5.financialcontent.com/investplace/quote?Symbol=DVY
  7. IDU: http://studio-5.financialcontent.com/investplace/quote?Symbol=IDU

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