Stocks or bonds? How about some of both?
If you hold bonds in your investment portfolio, you’ve likely noticed that they have experienced negative returns this year. As of April 29, the U.S. bond market (Barclays Aggregate Bond Index) has lost 3.3%, and the U.S. stock market (S&P 500 Index) has gained 12.9%. From 19282020, the U.S. stock market has earned an average return of 9.8%, and the U.S. bond market has earned an average return of 4.9%.
Which thereby raises the question: If stocks earn twice as much as bonds, why should anyone invest in bonds?
Based on long-term returns, investing 100% of one’s retirement savings in stocks may seem like the right thing to do, but very few investors have the intestinal fortitude to pull it off.
During a bull market, it’s easy to lose sight of the risk of losing money. In bull markets, most stocks go up -- even the dogs. However, during bear markets most stocks go down — even the bluest of the blue chips. During the bear market from October 2007 to February 2009, not a single U.S stock fund made money.
Investing in bonds can help provide the financial and emotional security of protecting your retirement savings from sus
I am always amazed how many individuals I meet in their 50s and 60s have so much of their retirement savings invested in stocks.
taining significant losses during stock-market downturns.
Stock and bond prices not always, but often, move in opposite directions. When the stock market is not doing well and becomes risky for investors, they withdraw their money and put it into bonds, which they consider safer. This increased demand raises bond fund prices.
The accompanying chart shows that over the last 90 calendar years, U.S. stocks lost an average of 13.7% in 24 of those years. During those same 24 years, U.S. bonds gained an average of 5.4% and provided positive returns in 22 of those years.
Considering the financial goals of most individuals, investing in stocks and bonds should not be an either/or decision.
I am always amazed how many individuals I meet in their 50s and 60s have so much of their retirement savings invested in stocks. They have no idea how much potential risk they are taking.
While more money is always better than less, at some point in time, the increased level of risk needed to try and outperform the market or achieve a higher rate of return should no longer be the goal. The reason is that the potential damage of an unexpected negative outcome that reduces wealth far exceeds the potential benefit of an unexpected positive outcome that increases it.
Smart portfolio management is as much about managing risk and protecting the downside as it is about seeking gains during up markets. And having a core holding of various bond and stock funds can help build and preserve more wealth at a more consistent and steady rate in both bull and bear markets.
Martin Krikorian, is president of Capital Wealth Management, a registered investment adviser providing fee- only investment management services, located at 9 Billerica Road, Chelmsford. He can be reached at 978-244-9254, www.capitalwealthmngt.c om, or via email at info@capitalwealthmngt.c om.