If You Need Stocks, You Can’t Afford Them

According to economist Zvi Bodie. In a Money magazine article he says that if you need the high return of stocks to reach your goals then you can’t afford to invest in stocks. You should read the article to get all the details but this is a general summary of what he says. He states that stocks are too risky an investment for retirement investing and suggests a portfolio of TIPS instead; you should only invest in stocks what you can afford to lose. He also says that you should save 20%-30% of your income or more so you will accumulate enough money for retirement despite not having the higher returns from stocks.

This is an interesting point of view and I can agree with it somewhat. As he states when you are saving for retirement you can either sacrifice by having a lower standard of living now, working longer, or taking more risk in your portfolio. If you are able to maintain a low standard of living and save a large percentage of your income than the returns you receive are not as relevant as when you are saving only 10% of your income.

Personally, I am still going to be investing in stocks. They are risky but since I have started saving late in the game and don’t have much income I need the high returns of stocks to accumulate enough money to retire. Even if I were young and just starting out I don’t think I would put 100% of my money into TIPS though. That just seems too conservative to me. Once I have accumulated all the money I need then I might consider putting a large percentage of my investments in TIPS or some other form of guaranteed income but until then I will stay invested in stocks.

What do you think of Bodie’s advice?

My Stock Portfolio

photo credit: kevinzhengli

Some of you have expressed interest in what stocks I own. I’ve been reluctant to share this since I’m not a stock expert and I don’t want my portfolio to be seen as advice on what you should buy.

I currently have twelve stocks in my portfolio. It would be better to have more but this is what I can afford at the moment. These are the current holdings in my stock portfolio: Bemis (BMS), British Petroleum (BP),Consolidated Edison (ED), Great Southern Bank (GSBC),Johnson and Johnson (JNJ),Coca-Cola (KO),McDonald’s (MCD),Realty Income (O),Pitney Bowes (PBI),Power Shares International Dividend Achievers (PID),Ship Finance (SFL),Universal Health Realty Income Trust (UHT).

Most of these stocks were chosen because they had a consistent history of raising dividends or had a nice dividend yield. Ideally they would be like O and have both. An 8.4% yield and a consistent history of increasing their dividend since their listing on the NYSE in 1984. I don’t particularly like investing in funds but I have PID since I am under diversified and need more international exposure.

My return on investment since I started investing last October is 4.9% or 7.2% annualized. The actual ROI is higher than that since I didn’t invest all my money at once, I’ve been slowly adding to my portfolio since then. I just calculated this figure for this post and initially thought this wasn’t a very good performance. Considering the S&P 500 index lost 22.56% the last quarter of 2008 and is down 2.67% this year my performance looks pretty good.

This performance would be a lot better if I would have been quicker to unload GE. On the other other hand if I hadn’t bough GSBC, which more than doubled, my performance would be a lot worse. That is how diversification works. If one stock sucks, there should be some others that pick up the slack.

My initial plan for this portfolio was to eventually have enough dividend income to cover my monthly expenses. I’m no longer sure if I’m going to pursue that plan since I’m looking at having a wider variety of investments. I’ll still have stocks they will just be a smaller percentage of my investments overall.