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 stalwarts
Ford (NYSE:
F) and
GM -- companies that once had brokers
enamored enough to sell their "low-risk bonds" to generations
of Americans -- flirted with disaster as well.
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
Disney (NYSE: DIS) and
Pfizer (NYSE: PFE).
Conversely, if you'd labeled yourself "aggressive," you
might have been told about an up-and-coming small cap such as
Dendreon (Nasdaq: DNDN), or an
emerging-markets play such as
Infosys (Nasdaq: INFY). Even a
self-identified aggressive investor, however, would probably
not have been introduced to a small
andforeign company such as Peruvian bank
Credicorp (NYSE: BAP). Too risky, right?
Not really. Those designations are arbitrary, and though
I've constructed the following table by cherry-picking
specific stocks, their sector-specific indexes aren't far
off:
Company
2008 Return
Disney
(29%)
Pfizer
(17%)
Dendreon
(26%)
Infosys
(45%)
Credicorp
(33%)
Data from Morningstar.
As you can see, those arbitrary designations of risk
weren't predictive in this year. Yes, Pfizer held up best,
but neither "safe" stock offered
that muchprotection.
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
Disney
4%
Pfizer
(6%)
Dendreon
27% Continued... |