To Get Ahead, Stick Your Neck Out

Excerpted from Peter Coy, Nikolaj Gammeltoft & Karen Weise, Business Week

Nobody’s forcing you to take risks as an investor. You’re free to stash your savings in three-month Treasury bills at a current yield of 0.02 percent a year. Just bear in mind that if that rate persisted, it would take you 3,500 years to double your money. Actually, it’s worse: If inflation averaged 1 percent annually, the buying power of your ultrasafe T-bills would be reduced over that period to one-quadrillionth of its current value.

Hunkering down may be a prudent short-term strategy, but eventually you need to poke your head out of the foxhole and look for ways to make some real money. The good news is that stocks, high-yield bonds, and real estate are cheap by historical standards and stand a good chance of appreciating strongly over the next decade or so. In fact, after five monthly declines in a row, stocks jumped 9 percent from Oct. 1-Oct. 25.

“Stock values today are the most attractive relative to bonds in more than one-half century,” Jeremy Siegel, a professor of finance at the University of Pennsylvania’s Wharton School. “It is the fear of short-term fluctuations that keeps stock prices so low, and this generates the superior returns that stockholders have always achieved when buying at favorable valuations, such as we see today.”

You can think of today’s ultralow interest rates as a hard shove from Federal Reserve Chairman Ben Bernanke to get you out of your defensive posture. One way low rates juice economic growth is by inducing investors to reach for yield by putting their money to work in riskier investments.

Persuading people to buy when prices have gone down is a challenge. In focusing on the weak returns in stocks over the past decade, “investors are all looking in the rearview mirror,” says Daniel J. Genter, chief executive officer and chief investment officer of RNC Genter Capital Management. Skittish investors withdrew an estimated net $341 billion from U.S. equity mutual funds from the start of 2008 through September 2011, including $61 billion so far this year. The share of mutual-fund-owning households that want below-average or no risk rose to 23 percent in May of this year, from 14 percent in May 2008, while the share seeking above-average risk shrank.

Investors in 401(k)s have the right attitude. They put their investing on autopilot. During the market’s swings of 2007 through 2010, Vanguard Group found that the share of contributions going into equities in its defined-contribution plans stayed within a narrow range of 68 percent to 74 percent.