Salient to Investors:

Seth Masters at Bernstein Global Wealth Mgmt says:

  • Bubbles today are driven by fear and investors’ desire for safety versus greed and recklessness in the past.
  • Supposed safe havens of gold, bonds and dividend-paying stocks are dangerously overpriced.
  • Over the past 5 years more than a trillion dollars have flowed out of stocks and into bonds in the US. Investors moved to index funds because they felt actively managed funds were risky – that strategies like growth or value were risky and dividend strategies were safer. Investors moved into precious metals.
  • Reaction to the 2008 financial crash is excessive. The broad-based flight to safety has polluted every sub-style of investing.
  • The two risks investors need to balance are the risk of near time loss of capital and the risk that you run out of money. If you invest 20 percent in stocks and 80 percent in bonds, your probability of suffering a 20 percent loss is less than 2 percent, while your probability of running out of money is 24 percent.
  • Many stocks with high dividends lack growth potential. Utility stocks were recently at a record 50 percent premium to their historical average valuation. And most utilities are heavily leveraged, strictly regulated and very sensitive to changing energy costs.
  • There are cheap stocks in every sector.
  • Indexes tend to be overweighted in whatever’s been hot. High-dividend stocks are 44 percent of the S&P 500 Index versus the historical average of 33 percent, so expect a significant correction.
  • The least efficient gold producers can produce an ounce of gold for $800, so the fact that gold trades for twice that shows people are buying it because they’re scared.
  • A company buying back stock is not automatically attractive.

Read the full article at http://www.bloomberg.com/news/2013-04-09/the-scary-risks-of-safety-bubble-up.html

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