Economy changes way of thinking

BOSTON (AP) — Stocks always rise over the long haul. Bonds are for retirees and investors with little taste for risk. Companies rarely cut their dividends.

Those are three of the long-followed rules of investing — and rules that, as investors learned during a year of the stock market’s worst turmoil since the Depression, can’t always be counted on.

The new rules: Bonds may be the better long-term bet. Diversifying your portfolio means more than just picking different types of stocks. And nothing, including the humdrum money market fund, is risk-free.

Here are five examples of how the year after the meltdown has changed the old thinking about investing:

ASSET ALLOCATION

Conventional wisdom: Safe investing means adjusting the mix of stocks and bonds in a portfolio based on an investor’s age and appetite for risk. Stocks were expected to beat bonds handily over the long haul.

New thinking: A broad measure of the bond market, the Barclays Capital U.S. Aggregate Bond Index, is up nearly 14 percent since October 2007. That compares with a 28 percent decline for the Standard & Poor’s 500 stock index.

Going back five years, to well before the recession, bonds still win. They’ve returned an average 5 percent a year versus just 1 percent for the S&P 500. And the last 10 years have been a lost decade for stocks. They’ve had an average annual loss of 0.5 percent compared with an annual gain of 6.2 percent for bonds.

But bonds also may face headwinds in a few years. Deficit spending by the federal government may ignite inflation and drive interest rates higher, which would depress the price of bonds.

“Bonds are about to take a big hit,” predicts Dan Deighan of Deighan Financial Advisors, a firm in Melbourne, Fla., that manages more than $150 million for wealthy investors.

STOCK DIVERSIFICATION

Conventional wisdom: You should diversify your stock portfolio to protect yourself in bear markets and get the best returns in bull markets.

New thinking: The dramatic stock rally since March suggests a slowdown is inevitable and that it’s time to move more into value stocks. But a robust economic rebound could reignite the rally, meaning growth stocks would provide the best chance for big returns.

It all depends on what type of economy emerges. Typically, the economy will grow at least for several years after a recession.

Experts say to expect more volatility in the economy — a choppy recovery, not a steady upward climb.

ALTERNATIVE INVESTMENTS

Conventional wisdom: Keep stocks and bonds as the foundation of your portfolio and put minimal amounts in other types of assets.

New thinking: Put more of your retirement nest egg in tangible assets. Think not only about your home but also about other kinds of real estate, as well as gold bullion, says Deighan, the Florida financial adviser.

Many investors have already turned to gold and real estate as hedges against stock market downturns, higher inflation and a weakening U.S. dollar.

DIVIDENDS

Conventional wisdom: Stocks that pay dividends ensure you a steady stream of income.

New thinking: So far this year, companies have cut dividends at a record pace. During the five decades before last fall’s meltdown, about 15 companies increased their dividends for every one that cut, according to S&P. So far this year, dividend cuts are running ahead of increases.

Elaine Durham Mobley, a widow and retired bank accountant, used to receive $5,161 in dividend checks every three months from Bank of America and General Electric. Those checks now total $682. About a third of her $64,000 in annual income has vanished.

“I always thought these dividend stocks were quite safe,” says Mobley, 75, of Sautee Nacoochee in the mountains of northern Georgia. “But we have to remember the law: There’s nothing sure in life but taxes and death.”

RISK

Conventional wisdom: Some investments are risk-free. You can put money in them and not worry whether it’s safe.

New thinking: There is no such thing as risk-free. At the height of the financial crisis, one large money-market mutual fund, the Reserve Primary Fund, exposed investors to losses because the fund bought debt of Lehman Brothers, which went bankrupt.

The government rushed in with guarantees for money funds similar to banks’ FDIC insurance — guarantees that expired this month. New rules will further restrict the investments money funds can make and lower their risk. But they come at a cost. Money funds are averaging yields of less than one-tenth of 1 percent — barely better than cash.