As the past couple years have shown, it can be risky to own stocks. But, Forbes‘ David Dreman says, steering clear of equities is also a gamble.
“Is it risky to own stocks? Sure — it always was,” Dreman writes in his latest column. “But it’s also risky not to own them. If you have all your money in bonds you run the risk that inflation will come back and ruin you. I consider inflation risk to be one of the most underappreciated hazards of investing today.”
Dreman says that the bursting of the real estate bubble led to a “flight from risk almost as irrational as the cavalier acceptance of it before [when firms loaded up on risky mortgage-backed securities that crumbled]. A year ago the stock market was priced on the assumption that earnings would never recover. Treasury bonds were priced on the assumption that deflation would be with us for a long while.”
Shunning stocks and buying Treasuries was thus the wrong thing to do last year, Dreman says, adding that investors should maintain their equity exposure this year. Because of the threat of inflation, he’s particularly high on commodity-related stocks. Among his recommendations: Freeport-McMoran Copper & Gold and Occidental Petroleum.