Professor says stocks are often too risky even for long-term investing.

As a scholar who lectures that stocks are more risky than people want to admit, Zvi Bodie freely admits that he's not making friends in the investment advisor community. But it's even worse than that.

In the world of active equity investing, the stuff that Bodie has been preaching lately probably has all the appeal of a stink bomb. Even that may be putting it lightly.

"That group views me as the enemy-basically a dangerous person," says Bodie, almost half-jokingly.

It's not that Bodie feels stocks are all bad. He feels they do have a place for people who have locked in their retirement savings and have some extra money to invest.

But that's not typical, and that's why Bodie, in his lectures and in his co-authored book, "Worry-Free Investing," feels that many advisors have got it all wrong about stocks and are putting their clients most vital assets at risk as a result.

The underpinning of Bodie's investment philosophy is that stocks are far riskier than advisors are leading their clients to believe. Too many portfolios, he says, are built on the fundamental belief that over the long run stocks are almost a sure bet. This view holds that if your investment horizon is ten years or more, stocks are a safe investment play and a better investment than bonds.

Advisors commonly use the buy-and-hold strategy for their most risk-averse clients, states Bodie, who is a professor of finance at Boston University School of Management. It was a view pushed heavily in the 1980s as the mutual fund industry grew, gained momentum during the historic bull market of the 1990s, and is still preached by advisors in the wake of the market's fall three years ago.

Advisors, Bodie maintains, have it all wrong.

Stocks are indeed risky no matter how far out your horizon, he says. Statistically speaking, he adds, scholars have always known this to be fact. It's just that practitioners have decided to ignore it. What advisors should be looking at, he says, are I Bonds and TIPS-inflation-protected products that ensure asset protection-for the core of their clients' retirement savings needs, with equity investments reserved for assets above and beyond retirement needs.

"Virtually 100%of the investment literature aimed at the mass market is in disagreement with me," he says. "All I can say is, they have it wrong."

The problem, he says, is that investment advisors are not taking a full measure of risk. The tenet typically used by advisors, and which is backed up by nearly a century's worth of data, is that stocks over the long run provide a better return than government bonds. Bodie doesn't argue this point, noting that from 1926 to 2000, the inflation-adjusted real rate return on stocks averaged 9.3% per year.

But there's more to this picture, Bodie states.

"The problem with that is the metric you are using for risk-the probability of a shortfall," he says. "Risk as we use it in the real world always has two dimensions. There's the probability of a bad thing happening. But the other dimension is the severity of a bad thing happening."

In other words, even though the risk of a stock shortfall declines as the investment horizon grows longer, the risk rises that a shortfall will be substantial. This is proven, Bodie states, by what it costs to protect a stock investment with a put option. For example, he says, insuring a $100,000 investment with a put option over a one-year period currently costs about $8,000. That same put option, however, would cost $40,000 if the time horizon were 25 years.

If stocks are safer the longer you hold them, Bodie says, a put option should be cheaper with a longer time horizon. But the cost of put options generally rise proportionally to the number of years going out, he says.

"As you go further out, the probability of a worst possible outcome" gets higher, he says.

Bodie doesn't claim to have discovered this principle. He notes that Paul Samuelson, a 1970 Nobel laureate in economics, spelled it out in mathematical detail in a paper published in 1969. It was a paper that also had an influence on Bodie, who was a doctoral student at MIT around the time of the paper's publication. In that paper, Samuelson noted that all the data on the long-term historical performance of the U.S. stock market was based on a sample of one.

In the early 1970s, in fact, Bodie decided to do his doctoral dissertation on ways to hedge against inflation. It was then that he began to embrace the value of inflation-protected bonds, as well as realize that practitioners weren't interested.

"What I discovered was that one of the obstacles to getting people to understand the value of inflation-protected bonds was this hellacious belief that stocks are safe in the long run," he says.

Ironically, one of Bodie's classmates at MIT at the time was Jeremy Siegel, the author of Stocks for the Long Run, which generally touts the long-term viability of stock investments based on historical data. Bodie and Siegel, it turns out, often run into each other's paths on the lecture circuit. Siegel pumps up the value of stocks in his talks, and at his Bodie wags his finger at stock devotees- as they did at the Financial Planning Association's convention in Philadelphia in early November.

What transpired at the FPA's Success Forum was sort of a ying-yang message. On Sunday morning Bodie addressed a packed room of about 200 of advisors, and basically told them some of their professions "articles of faith" are defective.

"Stocks are not safe in the long run," he told them. "Beware using probability of a shortfall as a measure of risk."

On Monday afternoon Siegel, speaking before a much larger audience, used stock data dating back to 1802 to show that stocks have been better investments than bonds for a period spanning two centuries.

From 1802 to June of this year, Siegel said, stocks have provided an after-inflation return of 6.7% per year, compared with a 3.6% return for government bonds. He also pointed out that through history stocks have been volatile, but have unfailingly reverted back to a mean.

"There has never been a 30-year period where bonds have outperformed stocks," said Siegel, who could not be reached for comment for this article.

Whom is an advisor to believe?

Paula Hogan, president of Hogan Financial Management in Milwaukee, who invited Bodie to speak at the Success Forum, feels advisors are more receptive to Bodie's warnings after the volatility they've experienced in recent years.

"The current generation of investors and their advisors grew up in a world where the paradigm was, 'Stocks may be volatile, but if you hold for a long time you win,'" she says. "It took the bursting of the stock market bubble to look at the other half of the idea, which financial economists have always been aware of, that stocks are risky even in the long run."

According to Bodie, the contrast in his and Siegel's messages may not be as striking as it appears. Bodie still believes stocks are good investments, after an investor decides how much he needs for retirement and locks in those funds through hedging and inflation-protected products.

"(Siegel) agrees that if an investor wants to lock in a return without risk, the way to do it is with TIPS," Bodie says. "On the other hand, he doesn't think stocks are quite as risky as I might say they are."

There's also the question of whether or not advisors and investors are ready for the message he's preaching. As he notes, the facts about the risks of stocks are not breaking news. Yet advisors, relying upon historical performance, have generally held the view through both bear and bull markets that diversification and buy-and-hold strategies mitigate risk for even risk-averse clients.

Bodie, however, feels the time could be ripe for a change in attitude. He feels there will be an increased demand for the type of "worry free" products he's been advocating. As part of this effort, he serves as a managing director of Integrated Finance Limited in New York City. This recently formed consulting and investment company is specializing in trying to create more low-risk options for investors, utilizing the hedging and insurance-protected strategies touted by Bodie. One of its first forays has been to build a technology platform that will allow company 401(k) programs to take bids from insurance companies on annuity contracts.

Bodie, meanwhile, acknowledges that he continues to face a tough audience, partly because his message in some ways makes investment advisors, and their asset-based fee structures, irrelevant. But he does find he's made some progress in one respect: More people are willing to listen.

"All I can tell you is that I'm trying my hardest," he says. "I find it encouraging that I'm being invited to conventions of financial planners to speak."