New Rules For Stocks

It's almost over. Our love affair with stocks is going to fade. We'll get another little flutter of the heart, when the current business recovery lifts the market once again. Long-term investors will keep putting money in, despite their disgust with the corporate cheats. It takes many years for so strong an infatuation to cool. But the old, strong passion won't come back.

We're moving into another era, as the toxic effects of the bubble and its aftermath spread through the financial system. Just a couple of years ago investors dreamed of 20 percent returns forever. Now surveys show that they're down to a "realistic" 8 percent to 10 percent range.

But what if the next few years turn out to be subpar? Martin Barnes of the Bank Credit Analyst in Montreal expects future stock returns to average just 4 percent to 6 percent. Sound impossible? After a much smaller bubble that burst in the mid-1960s, Standard & Poor's 500 stock average returned 6.9 percent a year (with dividends reinvested) for the following 17 years. Few investors are prepared for that.

Right now denial seems to be the attitude of choice. That's typical, says Lori Lucas of Hewitt, the consulting firm. You hate to look at your investments when they're going down. Hewitt tracks 500,000 401(k) accounts every day, and finds that savers are keeping their contributions up. But they're much less inclined to switch their money around. "It's the slot-machine effect," Lucas says. "People get more interested in playing when they think they've got a hot machine"--and nothing's hot today. The average investor feels overwhelmed.

Against all common sense, many savers still shut their eyes to the dangers of owning too much company stock. In big companies last year, a surprising 29 percent of employees held at least three quarters of their 401(k) in their own stock.

Younger employees may have no choice. You often have to wait until you're 50 or 55 before you can sell any company stock you get as a matching contribution.

But instead of getting out when they can, older participants have been holding, too. One third of the people 60 and up chose company stock for three quarters of their plan, Hewitt reports. Are they inattentive? Loyal to a fault? Sick? It's as if Lucent, Enron and Xerox never happened.

No investor should give his or her total trust to any particular company's stock. And while you're at it, think how you'd fare if future stock returns--averaging good years and bad--are as poor as Barnes predicts. Among the questions for your list:

Buy-and-hold will fall into disrepute if stock returns lag. Investors will turn to various market-timing schemes that promise to help you buy near the bottom and sell near the top. But in the past, that hasn't worked often enough to save your skin.

Simplify your holdings, too. You don't need a lot of funds with a lot of fees. Planner Harold Evensky of Coral Gables, Fla., says he's moving toward indexed investments for 80 percent of his stock allocation, with just 20 percent invested in aggressive, fringe ideas (the best indexed investments follow the stock market as a whole).

In the new market, bonds may be competitive with stocks, and with lower risk.

If you ask me, diversified stocks remain good for the long run, with a backup in bonds. But I, too, am figuring on reduced returns. What a shame. Dear bubble, I'll never forget. It's the end of a grand affair.