When stocks are hurting, bonds look really attractive. But
that doesn't mean you should dump your whole stock portfolio
and run to their fixed income embrace at the first sign of
trouble.
The overall stock market plunged 37% in 2008, enough to
cut a $500,000 portfolio's value to just $315,000. Ouch. Some
investors suffered even deeper losses, leaving many licking
their wounds -- and wishing they'd been invested in bonds
instead.
After all, bonds gained 26% in 2008, per Ibbotson data,
and we're all after
the highest returns we can get. So would bonds, or at
least a greater proportion of bonds, have served you well?
Check out these possible portfolio allocations, and the
returns they would have produced in 2008:
Allocation
2008 return
100% stocks
(37%)
75% stocks, 25% bonds
(21%)
50% stocks, 50% bonds
(6%)
25% stocks, 75% bonds
10%
100% bonds
26%
Data: Ibbotson, via Martin Capital
Advisors.
Clearly, you should have been in bonds, right? Well, yes
-- in 2008. But when stocks do well, bonds often lag. For
instance, in 2006, stocks gained 16%, while bonds gained 1%.
In 2003, stocks gained 29%, while bonds gained 2%.
And sometimes both do well, like in 1995, when stocks
gained 37%, while bonds rose 32%. The gains or losses are
different each year. What should matter for your long-term
planning is what's likely and probable. Over most 20- and
30-year periods, stocks beat bonds. Between 1926 and 2008,
stocks averaged 9.6% annual growth, versus just 5.7% for
bonds.
As we get closer to retirement, it can make sense to add
bonds to our mix. But for money you won't need to tap for
many years, stocks deserve more serious consideration. Even
in down markets, many stocks won't lose as much as the market
as a whole; some will even gain value:
Company
2008 return
Wal-Mart (NYSE: WMT)
20%
McDonald's (NYSE: MCD) Continued... |