My wife and I were driving down the road the other day and we passed a Ruby Tuesday restaurant. “What was that song supposed to be about, anyway?” she asked. I said that it was about a hippie-chick who was so unwilling to become tied down by social norms that she refused to answer to any one name.
This got me to thinking about stocks.
Stocks are like hippies in that they are always changing their look. In the last three years of the 1990s, the DOW went up by about 30 percent a year. There are other times when stocks go down by just as much. One day you determine that your net worth is such-and-such, and the next day those old calculations are out the window. This is a fickle investment class.
Stocks are never boring. That’s the appeal. But fashions change. Who wants to be caught wearing bell-bottom stocks when straight-leg Treasury Inflation-Protected Securities (TIPS) again become the in thing?
What is the one bit of investing advice that most of the experts seem to agree on? Buy-and-hold, right?
What’s buy-and-hold all about? It’s about making a commitment. The experts are essentially telling us to marry our stocks.
The trouble is — the Ruby Tuesdays of the world don’t generally make the best life partners. We all long to be wild and free. But someone has to bring the car in to get the muffler replaced and she needs to do it at the particular time that the guy who offered to do the job set as the appointment time. I like hippies. But I have come to believe that they got carried away with the freedom thing. What’s the big deal about having a regular name like everybody else anyway?
Stocks are too flighty for my taste. I’m not against change. I’m against too much change. I like consistency too. I look for a nice mix of the two in my investment portfolio.
So here’s what I do. I’ve talked to some people who know about statistics and other jizz-jazz like that and they tell me that stocks have for a long time been generating an annualized real return of 6.8 percent. There are periods of time in which they generate far larger returns (if you are older than my six-year old, you can probably remember those days), and there are periods of time when they generate far smaller returns. In the long run, though, that 6.8 percent number is the number that matters.
My view is that investors should not even count returns greater than that when determining their net worth. Why count on something that isn’t going to be around for long? It’s only going to break your heart in the end to do so. The 6.8 percent return is the real thing. The rest is fluff. Forget her, I mean it.
At times of high valuation, you can’t even count on the 6.8 percent, unless you are willing to wait a long time (at least 30 years). So, at times like today, I move some of my money to more straight-laced asset classes, things like TIPS and IBonds. Stuff that might not come off as being quite as flashy as stocks. But stuff that you can count on to be there for you in times of need. You can see yourself getting old with TIPS and IBonds, and with stocks purchased at normal valuations levels too, can’t you? Today’s stocks are too fast to last.
Stocks are fun. I don’t say different. Sometimes it’s not fun you are looking for. Sometimes you want to have a serious conversation. TIPS and IBonds are serious-conversation sorts of asset classes. I concede that TIPS and IBonds are not glamourous. I think they’re cute as a button, though. As the sage Bruce Springstein once observed: “You’re no beauty but, hey, you’re allright, and that’s allright with me.” He’s a well-recognized authority on the effect of Cool Girls on Asset Allocation Strategies, so I figure he’s probably giving us the straight story.
The thing that always pulls me back to stocks is the 6.8 percent return. You’ll never get a return that attractive from TIPS or IBonds. It’s important to remember, though, that stocks can be counted on to provide a 6.8 percent return in a reasonable amount of time only when purchased at reasonable prices. At those sorts of prices, I love stocks enough to want to marry them.
When prices are at the sorts of levels that they are at today, I get nervous walking anywhere in the vicinity of a church while holding hands with stocks. Make a promise to have and to hold stocks, I mean to buy and to hold stocks, at a time when the P/E10 value is 26, one of the highest on record? Not this boy. Stocks today come with too much baggage. Stocks today are high-maintenance. Stocks today come with secrets from their past that they don’t want you to find out about. I’m not sure I even want to be seen alone with stocks nowadays. We’re old friends and that’s all, okay?
At times like today, I see an inner flame in the sorts of asset classes that some others might dismiss as “mousey.” It’s TIPS that are unforgettable at today’s prices. It’s IBonds that are always on my mind these days. Remember that Eagles song about the guy who found it a peaceful easy feeling to be falling in love because he was beginning the adventure with both feet firmly planted on the ground? Thats TIPS. That’s IBonds.
I don’t say that stocks never tempt me. My view is that stocks need to calm down a bit before they will be marriage material again. They’re still the talk of the town, but much of the talk nowadays comes in the form of ugly rumors. The thing is, they drive too fast and someone is going to end up hurt. Stocks need to learn to walk the line before I am going to bring them home with me to meet mom and dad.
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