Giovanni Rufino/CNBC/ Richard Drew/AP/ Aly Song/Reuters
With his pink shirt sleeves rolled up past his elbows, Jim Cramer, the hot-headed host of CNBC’s popular Mad Money program, hit the airways last summer just as the stock market rally began to sputter and offered viewers a tip on fixing a shredded portfolio. “Stocks as an asset class have become tarnished,” he said, referring to the gut-wrenching roller-coaster ride that average investors have endured over the past two years. “And I, as a noted stock evangelist, know that better than anyone. But, at the same time, I also know they are your best shot for making back all the money you lost.”
After plugging his book and punching up a few sound effects, the former hedge fund manager went on to suggest that investors “unlearn” the buy-and-hold philosophies made popular by billionaire investor Warren Buffett and start thinking like traders. That means buying on weakness and selling when things get too hot, taking advantage of short-term market fluctuations—just like the pros.
Admittedly, it sounds daunting—which it should, given that the odds are stacked against the average investor trying to beat the market—and somewhat self-serving considering it comes from a guy who makes a living ranting about stocks on TV. But there’s a glaring truth amid Cramer’s bluster. After experiencing a “lost decade” in the equities markets—the Dow Jones Industrial Average ended 2009 at roughly the same level as it was in 2000 (the S&P/TSX Composite Index fared only slightly better)—investors are left with precious few other options to grow what’s left of their savings. Bonds, although promising a stable source of income, are entering what some consider to be bubble territory. Meanwhile, other so-called safe investments like Guaranteed Investment Certificates, or GICs, are barely keeping up with inflation.
The idea of loading up on more stocks so soon after the crash, and in what remain uncertain economic times, might make some people’s stomachs churn. A recent poll conducted by Knowledge Networks for the Associated Press and CNBC found that average investors are growing more concerned about the market’s ability to provide for their retirements, with 61 per cent saying recent volatility has made them less confident about buying and selling individual stocks. A majority of those surveyed said they viewed the market as being fair only to some investors. But experts say investing in stocks right now needn’t be a sickening experience as long as one is selective and paying close attention. Think of it as a hair-of-the-dog elixir for a financial hangover.
The good news is that, if you’re relatively young—say, in your 30s—you have plenty of time to buy and hold until the markets fully recover, which they eventually will. If you’re closer to retirement, however, navigating the stock market requires a hands-on approach. Those who heeded the advice of their financial advisers and avoided selling as the markets plunged in late 2008 and early 2009 were rewarded with a nice rally. But with concerns about the possibility of a double dip recession coupled with deflationary fears, the markets have become choppy, raising fears of another portfolio-killing free fall just around the corner.
But market swings don’t tell the whole story. While the Dow may have begun and ended the decade under 11,000 points (after marching to a high of more than 14,000 and plummeting to a low of about 6,000), that doesn’t mean that everyone earned nothing on their equities during that period. Like other indexes such as the S&P/TSX, the Dow only records a selection of corporate stocks—in this case, 30 large publicly owned U.S. companies. And it only tracks the price of stocks, not what investors actually take home when dividends are factored into the equation. While companies of all stripes cut their dividends during the recession, they are expected to collectively raise the payouts as much as 20 per cent over the next two years, according to a survey of analysts by Bloomberg.
As a result, dividend stocks, once considered stable but sleepy parts of a portfolio, have drawn much more interest in recent months as investors look for alternative income streams over simple capital appreciation. “Dividends have meaning,” says Thomas Davidoff, an assistant professor at the University of British Columbia’s Sauder School of Business. “I think dividends are probably favoured over a growth story.”
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