There is no such thing as a low-risk stock.
That's the enduring conclusion of 2008, a year in which
ostensibly government-backed companies
Fannie Mae and
Freddie Mac imploded, and former dividend
stalwarts
Masco (NYSE: MAS) and
State Street (NYSE: STT) cut their
payouts.
Without low-risk stocks, it might seem that retail
investors like us are left in the lurch. After all,
conventional wisdom -- printed and distributed by just about
any mutual fund salesperson or financial advisor -- posits
that large-cap stocks carry lower risks than small-cap stocks
do and that U.S. stocks are "safer" than foreign stocks.
What happens in a world where there are no "low-risk"
stocks?
This isn't bad news at all, actually
Let's say you called yourself "conservative" a few
years back when developing an asset-allocation game plan. You
would've loaded up on large-cap U.S. stocks such as
American Express (NYSE: AXP) or
General Mills (NYSE: GIS).
Conversely, if you'd labeled yourself "aggressive," you
might have been told about an up-and-coming small cap such as
Old Dominion Freight (Nasdaq: ODFL) or an
emerging-markets play such as
Telkom Indonesia (NYSE: TLK). Even a
self-identified aggressive investor, however, would probably
not have been introduced to a small
andforeign company such as
Chemical & Mining Co. of Chile (NYSE:
SQM). Too risky, right?
Not really. Those designations are arbitrary, and though
I've constructed the following table by cherry-picking
specific stocks, the sector-specific indexes aren't far
off:
Company
2008 Return
American Express
(63%)
General Mills
10%
Old Dominion Freight
23%
Telkom Indonesia
(36%)
Chemical & Mining Co. of Chile
42%
Data from Morningstar.
Point being: Those arbitrary designations of risk weren't
predictive in this year. Yes, General Mills held up better
than its peers in this small sampling, but American Express,
the other "safe" stock, fared worst of all.
What safe stocks will get you
Yet you pay a cost when you invest in the stocks the
establishment considers safe -- namely, lower returns:
Company
5-Year Annualized Return
American Express
(4%)
General Mills
8%
Old Dominion Freight
6%
Telkom Indonesia Continued... |