Bonds Away! Stocks May Not Be the Play

Investors trip up in dozens of silly ways. They act on stock tips from their nitwit in-laws, send money to brokers they've never met, check their mutual-fund balances too often and lose patience too soon. But my guess is that this year's most popular gaffe will be the way investors categorize in their mind the past few years of robust U.S. stock gains. Some lost souls will view the spoils as perfectly normal and expect more of the same. God bless them. But even those with a sense of history may regard the period as merely unusual when, in fact, the stretch is unprecedented.

Does that mean it can't go on? That stocks must finally tumble in 1998? No. Perhaps the market's bounds will keep stretching like the elastic belt on your holiday trousers. But it does suggest that the risk of a retraction is more acute. A stiff sell-off last week--the worst New Year's start in seven years--underscores that point. And with Federal Reserve Chairman Alan Greenspan now spouting off about possible deflation in the economy, it may pay to favor bonds for a while. I'd certainly be slow to invest any new wads of cash--say, a year-end bonus--all in the stock market. More on that later. First, let's take stock of the times.

The Standard & Poor's 500, including dividends, rose 33.4% last year, 23.1% the year before and 37.4% the year before that, according to research firm Ibbotson Associates. This is the first time that the index has risen more than 20% in three successive years, and is the best three-year run ever. The index rose in each of the past seven years--not a first, but rare. And in that seven years it dipped as much as 10% only once, a record. The amazing run has prompted millions to stake their retirement on the bull market and by now has convinced many that a new era of prosperity is upon us.

One believer is economist Paul Boltz at T. Rowe Price, who notes that in the past 15 years the U.S. has been in recession only eight months, a growth line like no other. "What we are living through is astonishing," he says. So go ahead and pinch yourself. It isn't a dream. If you've been in the market for three years, yes, Virginia, you've doubled your money. So, even though we don't know how long this will last, the best course may be simply to stay in stocks, particularly if you have 15 or more years until retirement. Consistently trying to time the market's ups and downs is one of the silly ways that investors trip up. Few can do it.