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Bank Stocks

Chris Farrell Mar 20, 2008

Question: Chris, could you elaborate on your comment made on 3/14 about the undesirability of buying bank stocks. Do you mean all bank stocks? We’re several years away from retirement and are in the process of building an income-producing portfolio of stocks to supplement our pensions and other retirement savings. We carefully choose two bank stocks (USB and BAC) to be part of that portfolio because of their dividend payouts and perceived soundness. If banks such as these are not worth investing in, doesn’t this signal that the whole system is in far bigger trouble than most investment experts are letting on? I realize the laws involving tax treatment of dividends may change in the future, and there is always a risk with any investment. But might the current situation be an opportunity to purchase bank stocks with good fundamentals at a reasonable price? Jeanne, Lauderdale, MN

Answer: I like what you are doing with dividend paying stocks. Period.

What concerns me is the advice peddled by some on Wall Street that individual investors should plunge into bank stocks because they’ve been beaten down so much. Yes, bank stocks are down a lot. But that doesn’t mean they won’t go lower.

For instance, Laurence Kotlikoff, economist at Boston University and head of the financial planning firm ESPlanner, is one of the smartest people I know. He recently took a flyer on beleaguered Citigroup. After all, last year it was trading at $60 a share. He recently bought some shares when it fell to $30 following a string of massive write-offs. It’s now at $20. Of course, he can afford the bet, and there’s nothing wrong with taking a flyer on a hunch with a small amount of money. But for most people, I’m skeptical that it’s good advice. It’s better for Wall Street’s wallet rather than their customer’s return.

What you’re doing is part of a long-term, income producing retirement plan. Bravo.

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