How the Meltdown Is Rewriting Investment Rules

Stocks always rise over the long haul. Bonds are for retirees and investors with little taste for risk. Companies rarely cut their dividends.

In this Sept. 17, 2009 photo, retired investor Elaine Mobley, 75, is pictured at her home holding an...

In this Sept. 17, 2009 photo, retired investor Elaine Mobley, 75, is pictured at her home holding an issue of the Wall Street Journal which she subscribes to keep up with money matters in Sautee, Ga. Mobley lives off her investments and has lost 2/3 of her annual income from her poorly performing stocks. (AP Photo/John Amis)

(AP)

Those are three of the long-followed rules of investing — and rules that, as investors learned during a year of the stock market's worst turmoil since the Depression, can't always be counted on.

The new rules: Bonds may be the better long-term bet. Diversifying your portfolio means more than just picking different types of stocks. And nothing, including the humdrum money market fund, is risk-free.

Not even blue chips like Dow Chemical and General Electric, once considered so reliable they were deemed good for "widows and orphans," were safe when everything seemed to be crashing.

At their lowest points over the past year, each stock could be purchased for less than the price of lunch at McDonald's. And each company slashed its sacred dividend — Dow for the first time in 97 years, GE for the first time in 71 years.

As the meltdown helped take out half the stock market's value from its peak, investors and advisers began to question the time-honored strategies of the longest investing binge in American history, dating to the start of a bull market in 1982.

A historic rally over the past six months has restored some wealth and given everyone time to think about what went wrong and what can go right again. What's emerging is not so much rejection of old ideas but an effort to adjust them to fit a more unpredictable market.

"Gone are the days when a 5 percent to 7 percent return is viewed as too small," says Cassandra Toroian, chief investment officer of Bell Rock Capital, a Delaware-based money management firm. "People are willing to take a handful of singles as opposed to trying to get one big home run right now. That mentality will take years to come back."

Here are five examples of how the year after the meltdown has changed the old thinking about investing:

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1. ASSET ALLOCATION

CONVENTIONAL WISDOM: Safe investing means adjusting the mix of stocks and bonds in a portfolio based on an investor's age and appetite for risk. Younger investors were advised to own more growth stocks, then transition as they aged into more shares of well-established, blue-chip companies and into bonds, which return less but are less risky. Stocks were expected to beat bonds handily over the long haul.