One of the time-honored maxims is that stocks eventually offer the best returns over time. All investors need is patience.
Then 2008 came along. The historic collapse of the financial sector—and the portfolio-destroying selloff in stocks—left many investors wondering if the old maxim was still true.
This is the second of a two-part report. Click here for the first article: Why Stocks May Not Be Your Best Bet.
"The old buy-and-hold crowd—there are so many people changing from that," says Kathy Boyle, the president of Chapin Hill Advisors. "So many people I'm hearing from are so disillusioned with their brokers' advice. People are really getting fed up with that."
Still, once the shock of the past year wears off—and the economy shows signs of recovering—investors might find bargain-priced stocks attractive again.
"I think they're cautiously optimistic," says Gary M. Flam, portfolio manager at Bel Air Investment Advisors in Los Angeles. "Clearly they've been hurt by market declines, but I think they do realize that where valuations are now there's tremendous opportunity to be adding to equity profits. Now is not the time to be running from stocks."
Many pros think that because the market will remain so volatile, individual-stock pickers may do better than broad sector players.
"You're going to continue to see stock-picking and group rotation," says Boyle. "The groups leading this time are completely different than the groups that led the last rally...Financials are not participating."
Video: Market Outlook for 2009
Rick Pendergraft, analyst at Investors Daily Edge newsletter, is among those playing the infrastructure trend, in which President-Elect Obama plans to stimulate the economy through aggressive government-backed capital projects that will goose the market.
He he likes Astec Industries, a small-cap that specializes in road construction. In fact, many analysts see the smaller companies benefiting from the infrastructure boom even more than behemoths like Dow component Caterpillar.
Outside of such trend plays, financial advisers now are sifting through the wreckage that particularly afflicted some of the big balance-sheet stocks that normally are safety nets in time of economic upheaval.
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"That's what advisers and clients should be looking for," says Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh. "Where we're not trading on headline news and the next government bailout, but we're trading on what the market should trade on, which is fundamentals, balance sheets and earnings."
In 2008, Baum protected capital by using exchange-traded funds, or ETFs, that use baskets of stocks to limit volatility while still extracting return from hot sectors. With a better 2009 on the horizon, he is hoping to use the same strategy to collect returns.
"It's a very conservative way to play the rebound. Markets don't go down forever," Baum says. "It's part of the allocation mix. You can put together a broad-based market ETF, which gives you your core, then you can add alpha, add return, by doing sectors."
Among the ETFs expected to be in vogue are the various SPDR, or Spider offerings.
Baum is looking at the Energy Select Sector, which plays a basket of leaders in oil, gas, energy equipment and services.
Also, iShares offers a wide ETF variety, of which Baum is looking at the iBoxx High Yield Corporate Bonds fund that tracks high-yield bonds and contains some options plays as well.
His rule of thumb is a simple one that he plans to follow into the hoped-for recovery: If he owns something that he wouldn't buy at its current price, he dumps it.
"If we all do that, we won't see as many booby traps and in turn we won't see the kind of wealth destruction we saw last year," Baum says.
There's still a substantial school of thought that 2009 will be a year of peaks and valleys, with nimble investors scoring the best profits.
"We'll probably continue to have a choppy first half of the year, but it looks to me like the market is starting to get back to some normalcies," says Baum.
An Obama rally could carry the Standard & Poor's 500 over 1,000, says Boyle of Chapin Hill Advisors. But that would precede a massive selloff in the spring that would take the index to perhaps 650 in a retest of the October 2008 lows, she believes.
From there, she says the market likely would rally around July then stage another selloff into October.