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Alexis Leondis

Stocks vs. cash: In a volatile market, not all are taking Warren Buffett’s advice

By Alexis Leondis
Bloomberg News / May 28, 2010

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Howard Gellis, once head of Blackstone Group’s corporate debt unit, isn’t taking Warren Buffett’s advice to pick stocks over cash. “The events of the last month have reinforced why I’m absolutely not putting any new money in the stock market,’’ said Gellis, 56, who’s retired. “You shouldn’t put any money in the market you can’t afford to lose.’’

Individuals are sitting tight or returning to cash even as Buffett, chief executive of Berkshire Hathaway Inc., and money managers like Jerome Dodson, of Parnassus Investments, and Jeff Rubin, at Birinyi Associates, say stocks offer good opportunities.

Stocks are attractive because of corporate earnings forecasts and favorable valuations, Rubin said.

Investors had about 60 percent of their portfolios in stocks, 20 percent in bonds, and 20 percent in cash, according to a survey last month by the nonprofit American Association of Individual Investors. That compares with an average recommendation of 8 percent for cash from strategists at brokerages like Bank of America and JPMorgan Chase & Co., according to a Bloomberg survey.

“Clients want to make sure a dollar stays a dollar, and protection from loss is the paramount goal, rather than increasing money every day,’’ said Jane King, of Fairfield Financial Advisors in Wellesley.

Investors pulled an estimated $14 billion from US stock and bond mutual funds in the week ended May 12, the first net withdrawals since March 2009, according to the Investment Company Institute. The Standard & Poor’s 500 index has declined 5.2 percent this year but has gained 59 percent since the March 2009 market low.

“Trust in the market is elusive at best right now because of erratic economic news and the role greed and avarice played in the market meltdown,’’ said Helen Modly, at Focus Wealth Management in Middleburg, Va. “Folks naturally wonder who exactly is behind the curtain here.’’

But investors looking for returns may have trouble beating stocks. The average yield for a money market account, an insured bank product, is 0.79 percent and 1.38 percent for a 1-year certificate of deposit, according to Bankrate.com.

Investors are reluctant to put money in stocks even though they may miss another rally, said Joseph Spada, at Summit Financial Resources in Parsippany, N.J. “They don’t want to go back to 2008,’’ he said. “It’s still too fresh in their psyches.’’

Looking at previous declines shows it usually takes three years for retail investors to come back, so “if past is prologue,’’ investors should return in force by March 2012, Dodson said. For those reentering the market, the best way is dollar-cost averaging, or investing equal amounts periodically, Rubin said. He suggests those with $100,000 put a third in stocks and add a set percentage monthly.

And diversification — across countries, industries, markets, and currencies — is essential in this volatile market, said David Kotok, of Sarasota, Fla.-based Cumberland Advisors Inc.

Alexis Leondis writes for Bloomberg News.