Doug Ramsey thought he was bearing good news, but his audience wasn’t buying it.

Ramsey, research director at the Leuthold Group, was explaining why his famously bearish investment research firm had suddenly turned strongly positive on stocks. Their reaction? “A lot of skepticism,” Ramsey recalls. “Money managers are a pretty pessimistic bunch these days.”

Who can blame them – or you, for that matter – for being in no mood for a pep talk about stocks? With the Dow industrials off 35.8% this year through Monday's close, 2008 is set to be one of the worst years in U.S. stock market history.

Just how eager are you to hear about adding risk to your portfolio, when every neuron in your brain is screaming at you to get your money out of danger?

That impulse is understandable, but there’s such a thing as being too safe. Give me a hearing – even a grudging one similar to the one that Doug Ramsey got – and I’ll give you five reasons why.

1. Safety is too stingy

The problem with keeping your money safe is that everyone else today has the same idea. The demand has driven returns on low-risk investments to truly miserly levels. The most insane example is the safest-of-the-safe, the 3-month U.S. Treasury bill, which last week briefly reached a negative yield.

That’s right, less than 0%. In other words, to avoid the possibility of losing a lot of money in stocks or bonds, investors were willing to accept the certainty of losing a little money in short-term T-bills. That’s not a long-term strategy.

Of course, you do need safe options for your short-term savings – money set aside for any goal for the next three to five years. A good place for such cash is a money market fund such as Vanguard Prime currently the top taxable money fund on iMoneyNet.com, yielding 2.5%.

That beats a negative return, but you’ll need to do better than 2.5% to meet long-term goals like retirement. To get that return, you’ll need to take some risk.

2. Stocks might be safer than you think

Yes, stocks have been weapons of wealth destruction for more than 14 months now. But no bear market lasts forever. Eventually “The Moment” arrives – the point at which stocks have fallen so far that they become good investments again. By a number of measures, you could argue that The Moment has arrived, or will soon.

“By our calculations, stock valuations are truly attractive for the first time in 25 years,” says Ramsey. And he’s not the only one buying.

Warren Buffett is, too. So are other well-known investment brains like Bill Miller, manager of the Legg Mason Value fund and G. Kenneth Heebner of CGM Focus.

Economist Ed Yardeni at Yardeni Associates believes that the bear market hit bottom on Nov. 20, the day the S&P 500 closed 52% off its 2007 peak. “The good news,” says Yardeni, “is that after a bear market bottomed in the past, stocks on average were up 34.5% a year later.”

3. And if stocks are too scary, buy bond funds

Corporate bonds tend to be much safer than stocks, but they too were badly beaten up this year, with BBB-rated bonds down 12%.

As a result, they may now be close to a “Moment” of their own, says Daniel Fuss, vice-chairman of Boston money manager Loomis Sayles and lead manager of Loomis Sayles Bond fund. 

That’s especially true for investment-grade bonds, which now yield about 7.9%, some 6 full percentage points above Treasurys. (For the 10 years before the credit crisis hit, that spread ranged between one and two points). “Investment grade bonds are the cheapest I’ve ever seen them,” says Fuss, a 50-year veteran of the fixed-income markets. “Ever.”

4. That talk of a Depression? Ignore it

There’s a reason, of course, that stocks and corporate bonds are so cheap. Investors are worried about the recession, which, at the extreme, they fear, could blossom into a full-fledged Depression.

But most economists find that worst-case scenario far-fetched. “Is it going to happen in this economy?” says David Shulman, senior economist at UCLA Anderson Forecast. “No way.”

The 1930s saw a complete industrial collapse, says Shulman, triggered by Congressional protectionism and by the Federal Reserve of the time, which ineptly let the banking system implode and the money supply shrink by 33%.

Those misguided policies tipped an ordinary recession into the Great Depression. Congress, hopefully, has learned the lesson of the 1930s, says Shulman. The Fed and the Treasury certainly have. They are propping up the banking system and shoveling money into the economy as fast as they can. Eventually, that will get the wheels turning again.

5. No one rings a bell to tell you it’s safe

There are no guarantees, of course, that stocks or bonds will rebound in a few months or even years. That’s why you have to keep your short-term money safe. Only in hindsight will we know when the bear ended.

 Even so, the lesson of stock market history is that The Moment tends to arrive when the economy still looks grim and investors are grumpy – as grumpy, say, as Ramsey’s clients are now.

 If you wait for more definitive signs of a mend, chances are you’ll miss your big chance. As Warren Buffett wrote in an op-ed piece for The New York Times recently, explaining why he had begun to buy stocks even in the midst of an economic freeze: “If you wait for the robins, spring will be over.”

 

Eric Schurenberg, formerly managing editor of Money Magazine, is now editorial director of MoneyWatch.com.