Just saying ‘no’ to stocks

Financial planner Janet Briaud knows full well her industry’s standard lines about the stock market.

You’ve got to stay invested for the long term. Don’t worry about short-term volatility. Equities are the best way to generate wealth over time.

Briaud isn’t buying it. Not at these share prices, anyway.

For the last 31/2 years, the fee-only planner in Bryan, Texas, has kept stocks to a minimum in her clients’ portfolios, which now total about $450 million.

While many financial advisors perpetually recommend that investors hold at least 40% of their portfolios in stocks, and often more, Briaud’s clients have just 10% in the market.

And she says she doesn’t expect to boost that any time soon, unless equities get extraordinarily cheap.

For much of the last year, financial advisers like Briaud — who stresses capital preservation over all else — had to contend with a steadily rising stock market that left some clients anxious.

Weren’t they missing the boat, with the Dow Jones industrial average up 70% in 14 months?

Then came the May 6 “flash crash” on Wall Street, when the Dow lost nearly 700 points in the course of a few minutes, then clawed most of it back but still ended down 347 points for the day.

Other than blaming computerized trading, market regulators as yet don’t know what exactly triggered the flash crash.

What we do know is that volatility has returned in a big way to the stock market, after taking most of the last year off. The Dow, which tumbled 162.79 points, or 1.5%, on Friday to close at 10,620.16 on the latest fallout from Europe’s debt woes, has made triple-digit moves in eight of the last 10 sessions.

And coming so soon after the horrendous losses of September 2008 to March 2009, when major stock indexes dived 50% or more, the market’s wild swings this month naturally will have many investors again asking themselves that most basic portfolio question: How much can I afford to risk in stocks?

Classic investment advice is to ignore short-term volatility and stay focused on the long term. But as millions of people learned in the 2008-09 plunge, the math can be devastating: If your portfolio drops 50%, it has to rise 100% just to get you back to even.

Briaud, 59, says the problem with stocks is simply one of valuation: She thinks the market overall is too expensive relative to companies’ earnings. Better, she says, to conserve capital and wait for stocks to become bargains again.

That’s also the strategy of Bill Bengen, an El Cajon, Calif., financial planner who manages $50 million. He said he’s limiting his clients’ stock holdings to 15% of their portfolios.

With the financial system still stressed and the economic recovery’s longevity a question mark, keeping the traditional allocation of 40% or more in stocks “just doesn’t make sense in this environment,” Bengen said.

As for Briaud, her conservative approach to wealth management predated the last bear market. A financial planner since 1986, she says she early on studied the traditional value-investing techniques of Benjamin Graham, whose 1949 book “The Intelligent Investor” is the value school’s bible.

By 1999, with prices of many technology and blue-chip issues inflating dramatically, Briaud says, her Graham-inspired discipline drove her to begin selling stocks.

“We were dead wrong for a while,” she says. “We lost clients.”

With the devastating bear market of 2000-02, however, value investors were vindicated. But as the market began to recover in 2003, Briaud said, she couldn’t shake the feeling that stocks in general still appeared expensive.

She said she began to subscribe to the idea that the market decline that began in 2000, after nearly two decades of soaring prices, was the start of a long-term bear market

that would eventually force stock valuations down drastically.

Briaud didn’t foresee the credit crisis of 2008, but by being mostly out of stocks, her clients were spared the nightmare of deep double-digit losses. Her average account lost about 5.4% net of fees, she says.

What her clients gave up, of course, was the potential for double-digit returns last year as stocks roared back.

So far this year the stock market still is modestly positive: The Dow is up 2.9%, including dividends.

With stocks at just 10% of her typical client portfolio, Briaud invests mostly in fixed-income securities, including Treasury bonds, inflation-adjusted Treasury issues, tax-free municipals and cash accounts. Clients also have 5% to 10% in gold, and some have stakes in income-producing oil and gas partnerships.

Her goal, Briaud says, is to earn a 3% real annual rate of return, meaning the return over the inflation rate. “We’ll aim higher, but we know we’ll be OK if we do that return,” she says. Last year her average account rose 6.4%.

But what’s OK for Briaud’s investors might

not be enough for others. Nearly all of her clients, she said, are college professors or physicians. They are likely to have more wealth

to protect in the first place, and less need for growth of capital than, say, younger people starting out in other careers.

Briaud and Bengen both stress that they don’t dislike stocks on principle. They just want to buy them a lot cheaper, relative to companies’ earnings per share. Both say they expect to wait for average stock price-to-earnings ratios in or near the single-digit range, a scenario that is the dream of every value investor.

It is also a very bearish call: Currently, the average P/E of the Standard & Poor’s 500 index stocks is about 14, based on 2010 estimated operating earnings per share. So to oblige Briaud and Bengen any time soon, earnings would have to skyrocket — or, more realistically, share prices would have to plummet.

Could single-digit P/Es come again? “Every generation has had an opportunity to buy stocks at those levels,” says Bengen, 62.

More than likely, to get to those P/Es would require a horrid economic backdrop, including higher interest rates and/or higher inflation.

Individual investors have had it pounded into them that trying to time the market is foolhardy. The excuse of the value investor is that avoiding stocks isn’t about timing market cycles for their own sake, but about waiting for a true bargain.

Saying no to stocks today is easy enough if you just can’t stand the risk of loss. But if your goal in staying away from the market is to be ready for the next big opportunity, you’re going to need a game plan — and the strength of your convictions when the market gives you what you wanted.

tom.petruno@latimes.com