Should investors turn to bonds
instead of stocks? Certified financial planners discuss stock-market strategy in a Q&A.
The Dow Jones Industrial Average has lost more than 8 percent of its value since Jan. 26, and bonds are generating better interest rates than they have in years.
Is it time to make a switch? Two certified financial planners in Central Florida took time this week to discuss the possibilities and potential impacts.
Q: Seeing the Dow Jones stock index drop 300 points in a day alarms me, and it hasn’t shown gains overall since the start of the year. Bonds are paying better rates than they used to. Should I sell my stocks?
A: Take a longer view than recent months, planners say. Historically, stocks will perform better over the long haul. Balance in anyone’s overall investments remains key. “We don’t panic much about the short term,” said Marisa Bradbury of Sigma Investments. Besides that, better-paying bonds can carry some risk, too. And even those downer days aren’t keeping some stock indices from performing well, said Nancy Hecht of Certified Financial Group, noting that the NASDAQ is up 11 percent this year.
Q: OK, I hear you, but I’m still nervous. I’m determined to put more of my money into bonds, so what do I need to know?
A: Choose your bonds carefully. While rates are on the rise, keep the duration of those bonds short – think 1 to 3 years, Bradbury said. If you’re in a mutual fund comprised of bonds, Hecht said, look for the average duration of the bonds that the fund buys.
New tax laws can make corporate bonds attractive for higher interest-rate payouts. If you’re in a lower tax bracket, the higher standard deduction for taxpayers gives them a new edge for some people who are used to focusing on tax-free municipal bonds. Their rates could pay off enough to still come out ahead after taxes.
And you might want to cross high-yield junk bonds off your list because bankruptcy filings could lead to losses. “We don’t want to take risks on the fixedincome side of an investment portfolio,” Bradbury said. And some bond funds can drop in value because when rates go up, so does the price of the bonds involved. “On paper, you’ll see a loss,” she said. Q: So how do I set the right balance of stocks vs. bonds?
A: One consideration: Keep future inflation in mind. Even federal bonds designed to keep pace when inflation goes up are geared toward national averages, rather than the inflation you might see in your home life, Bradbury said. Keeping a fair amount of your money in stocks can guard against inflation loss – to that end, Hecht pointed out that during the past 12 months, the Dow is up 14 percent, the NASDAQ is up 23 percent and the Standard & Poor’s 500 is up 13 percent. The Consumer Price Index shows inflation of 2.8 percent for the 12 months that ended in May.
And factor stocks’ dividends into the returns they create. Even some stocks that are dropping in price can pay enough dividends to make them worth owning, Hecht said.
“People need to pay attention to their investments, and not panic,” she said. Q: I’m retiring. Where should my investments be?
Any investment portfolio requires diversification, planners say repeatedly. Speaking with a certified financial planner or a broker should include varied potential investments. Someone retiring today, Hecht said, likely intends to make their money last 20 years or more without sacrificing their lifestyle.
Health care and housing tend to see inflation higher than the federal CPI shows, Bradbury said. Bonds that pay better because of increased interest rates typically cost more to buy into. And low stock prices for someone moving their retirement money or even still investing while working can create a chance to buy at a discount, in effect.
“For some reason, we like to buy everything on sale except our investments,” Hecht said. Got a news tip about taking care of your money, or jobs and careers in Central Florida? wzimmerman@tronc.com or Twitter, @ZMediaWorks