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Coping with the stock market

- Alan Lavine and Gail Liberman

The best advice I've heard about the stock market was written in the 19th century by Mark Twain.

"October," he said. "This is one of the peculiarly dangerous months in which to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February."

One thing is for sure. The next 10 years in the stock and bond markets will be different from the past 10 years. In the 1990s, the S&P 500, an index that measures stock market performance, grew at an 18.2 percent annual rate. Bonds grew at a 7.7 percent annual rate.

A report by Payden & Rygel, a Los Angeles-based investment company, forecasts that investors will have to settle for less over the next 10 years. It expects:

  • Large company stocks to grow 3 percent to 10 percent annually.

  • The dividend yield on large company stocks to range between 1 percent and 2 percent.

  • Large company non-U.S. stocks will grow between 5 percent to 15 percent annually.

  • Large company non-U.S. stocks will yield between 1 percent and 2 percent.

  • The total return on U.S. investment grade corporate bonds will range between 4 percent to 7 percent. The yields will range between 5 percent and 6 percent. The principal value of those bonds will range between -1 percent and +1 percent.

    "In the coming 10-year period, returns on stocks are likely to mirror growth in corporate earnings," the report says. "Equity valuations are already high, and dividend yields are low. Investment-grade bonds are starting from a low level of interest rates that will make it difficult to generate high returns."

    What does all this stuff mean? In a nutshell: If you're looking for growth, you will have to be less greedy. If you're living on a fixed income, you will need to manage bonds and CDs better to maximize income.

    Haywood Kelly, editor-in-chief of Morningstar Inc., a Chicago-based analytical firm, says now is the time to reassess your investments.

    "We've heard from a lot of investors who don't even want to think about their investments these days," Kelly says. "That's a mistake--for two reasons. First, the market's drop means your portfolio has changed. Is your portfolio still as diversified as it should be? Are you holding onto risky investments just hoping they'll bounce back?"

    Kelly says that now is the time to address problems and make improvements in your holdings. When the market declines, you can buy good businesses at cheaper prices. That's good news over the long term.

    Meanwhile, bond investors may need to shop around for the best values in corporate, foreign and municipal bonds. You should also keep an eye on CD rates. Interest rates are at a 40-year low. There is nowhere to go but up. The question is when?


    Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

    To read more columns, please visit the column archive.

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