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February, 2009


Several years ago, following the last bear market (2000-2002), super-investor, Warren Buffett, warned us all that wise counsel for our nest egg planning in future would be to have "low expectations," suggesting that a total return (price growth plus dividends) of about 6% a year was the best for which we might realistically hope. As it has in fact turned out, many now would love to simply have had that 6%, rather than the paltry return they have actually received on stock market purchases since 2002. If people had invested $10,000 in the S&P 500 Index on 12/31/02, they would have about $8750 today, less fees, commissions, and taxes (on gains in the good years).

Of course, Buffett did not say how long a period he was discussing, and it is still possible that eventually the markets will provide the indicated rewards for long-term holdings. The point is that now, thanks to the recent meltdown, investors are at last ready to hear his message. The operative attitude extant these days would seem to be: even lower expectations.

The likely scenario for our economy in the next several years, and so for the stock market as a crude proxy for it, would appear, to judge by the majority mood, to be one of three negative outlooks: bad, worse, or worst.

At best, folks think we shall have a deep and prolonged recession. However, it is generally believed it would not take much more to tip us into a mild depression, one such as the Japanese experienced in the 1990s and what people are calling "a lost decade," in which little or no net growth occurs, there is high unemployment, and stock or home prices remain low.

Then there are those that think "the other shoe" has yet to drop, but that when it does, maybe due to further precipitous declines in housing, a cascade effect that decimates many of our remaining financial institutions, a major new terrorist attack, etc., nothing government does will prevent a global Great Depression type debacle, from which it may take a generation or more for us to crawl out.

I know that, historically, when the market has been down as much as it was last year, it usually surges back in the following year or two. However, even if that occurs this time, there is no guarantee the gains will not be erased soon thereafter by fresh downward volatility.

So, what is an investor to do? One approach I like would be to take Buffett up on his advice and keep our expectations low, but meanwhile consider putting new funds into things that are at once fairly conservative and yet would provide us a good income regardless of what the uncertain stock market does. I think his 6% figure may be about right, but instead of planning to get that in growth plus dividends, I would put my hopes in the yield itself. If I can get 6% a year on each dollar I invest and keep much of it growing tax free in a 401K or an IRA or else use it to live on without touching my principle, then I can rest easier while waiting for eventual stock market gains, whether they arrive later in 2009 or take as many as 10-20 years to show up.

As it happens, the tremendous selling in most assets over the past 3-4 months has resulted in a number of 6%(+) yielding mutual funds or common stocks from which to choose. So I shall pick among them those that seem likely to weather difficult times and that may even increase in value over time. You might do the same kind of research to come up with your own list. These are the ones I like best:

First, I would buy a good intermediate bond mutual fund. My favorite is Vanguard Intermediate-Term Investment Grade Fund Bond Index (VFICX) (recent price $8.63), which currently yields about 6% after the fund's very low annual expense ratio of 0.21%.

Next, I would buy each of several relatively low risk stocks with dividends of 6% or higher:

Royal Dutch Shell 'A'RDS/A$47.546.88%
Verizon CommunicationsVZ$28.816.57%

The market might, as we have seen, do crazy things in the short-term, so it may be better to gradually put one's toes into these waters, buying after significant market drops in order to accumulate assets across a 12-18 month span rather than all at once. If there are further steep declines, one might then have bought more shares during the dips, increasing the total number of shares obtained and so lowering one's average per share cost.

The stocks mentioned appear likely to still be viable in the years ahead and do not have exceptionally large dividend payout ratios. They would also seem to be ones that should appreciate well once we do have a turnaround among equities. Indeed, Buffett's comments aside, I would personally think these might double over the next five years or so. If not, one could do worse than to receive around 6% or so a year on such investments through the dividends alone.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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