Many investors have one or two "safe" stocks they own that, for whatever reason, have become sentimental favorites they never consider selling.
These companies typically are household names, large, and considered by almost everyone – even fund managers – to be safe investments.
That means even if you're not holding such stocks in your personal portfolio, you may own mutual funds that own them, or they could lurk somewhere in your 401(k).
Many "safe" stocks are really hidden time bombs, ready to blow a big hole in your portfolio at any moment.
And as Money Morning Chief Investment Strategist Keith Fitz-Gerald points out, even the most stable, veteran companies can morph into portfolio-destroying dogs.
"Just because you think a stock is safe doesn't mean that the markets will treat it that way," Fitz-Gerald said.
What's more, he said, is that "the very definition of safe has changed," noting how the massive leverage common on Wall Street can unravel a company almost overnight, as happened with Lehman Brothers at the height of the 2008 financial crisis.
How Safe Stocks Can Turn Dangerous
What else can make a seemingly safe stock go bad?
Fitz-Gerald listed several factors. Sometimes a company's products get out of sync with the marketplace. Sometimes poor management ruins a company from within. Sometimes new developments invalidate the company's business model.
Fitz-Gerald said the tragic saga of General Motors (NYSE: GM) presents a real-world cautionary tale.
He said he knew a woman whose financial adviser had invested her money almost exclusively in GM stock and was nearly wiped out when the iconic U.S. automaker went into Chapter 11 bankruptcy in 2009.
When the housing bubble burst in 2007-2008, Fannie Mae plunged from $67 a share to under $1 – a loss of nearly 99%.
To avoid getting burned by a safe stock, Fitz-Gerald said investors need to resist getting emotionally attached to any stock and should always use trailing stops to prevent huge losses that can come when a stock suddenly goes over a cliff.
"Don't fall in love," he said.
Safe Stocks to Oust From Your Portfolio
Investors also need to periodically review all components of their portfolio to make sure that an apparently safe stock hasn't evolved into a liability.
This variety of "safe" stocks go rotten slowly. So instead of plummeting rapidly, they simply stagnate, dragging down a portfolio's performance rather than suddenly stabbing it in the heart.
"They're all dead money," Fitz-Gerald said, singling out Microsoft in particular.
"Microsoft used to ooze innovation – now it oozes MBAs. It's become the very company it set out to defeat when it started," he said. "Better to play with smaller, more nimble and aggressive alternatives."
Other Money Morning experts also weighed in on "safe" stocks that investors need to avoid.
Money Morning Global Investing Strategist Martin Hutchinson picked Google Inc. (Nasdaq: GOOG), which has enjoyed a recent price surge to about $800 a share.
"[CEO Eric] Schmidt is selling out, and the company is about to waste money on retail and hardware. neither of which are businesses it understands," Hutchinson said.
And Money Morning Global Energy Strategist Dr. Kent Moors sees some major oil and gas producers at risk.
"Until the latest financial hurdle [i.e., sequestration] is overcome, or actually kicked down the street,the energy sector will experience significant volatility [largely downward pressure]," Moors said. "When this happens, there is a knee-jerk reaction to conclude demand will decline."
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