6/25/2014 3:45 PM ET|
The same returns with half the risk?
Adding bonds to balance your retirement portfolio reduces risk and only slightly changes your total investment returns.
Don't go overboard when deciding how much of your portfolio to put into stocks.
That advice is particularly timely now, as memories fade of the 2007-09 bear market and many investors find themselves with swollen stock allocations -- either consciously, or unwittingly through failing to rebalance their holdings.
The Investment Company Institute, a fund-industry trade group, reports that more than a quarter of investors have 100 percent of their individual retirement accounts invested in stocks, including those between 60 and 64 years old. Another 16 percent have at least 80 percent of their IRAs in stocks.
Most people recognize they need to lean heavily on stocks to fund retirement. Yet the extra return you earn for going with an all-equity portfolio is small relative to a traditional balanced portfolio that puts just 60 percent in stocks and the other 40 percent in bonds.
Since Jan. 1, 1926, according to Ibbotson Associates, an index fund benchmarked to the S&P 500 ($INX) or its predecessor would have produced a 10 percent average annual return, assuming dividends were reinvested. A portfolio that allocated just 60 percent to this S&P index fund and the remainder to intermediate-term U.S. Treasurys (which are considered risk-free) would have gained 8.7 percent annualized, or 1.4 percentage points a year less, on average.
That certainly appears to be a rather modest price to pay for cutting your portfolio's risk nearly in half, as measured by volatility of returns.
To be sure, this small annual difference compounds into something larger -- if you have the uncommon discipline to hold through thick and thin. Over 20 years, for example, $100 invested in the stock index fund would grow to $682, versus $529 for the 60/40 portfolio.
Yet it is the rare investor who actually is able to hold stocks through bear markets. "The people who can truly stomach the volatility of a 100 percent stock portfolio are either catatonic or dead," says Claude Erb, a former fixed-income and commodities manager at mutual-fund firm TCW Group.
Furthermore, many of the erstwhile all-stock investors who at some point bail out do so at the worst possible times -- near the bottom of a bear market -- and don't get back in until a bull-market recovery is well under way. As a result of this counterproductive behavior, Erb says, it is extremely rare for an investor's real-world return to be anywhere close to an all-stock index fund's theoretical potential.
You are much less likely to engage in this destructive behavior with a 60/40 portfolio, and therefore odds are good that you will perform just as well over time, if not better, than if you were to invest 100 percent in stocks.
There is another reason not to overweight your equity allocation: It is unlikely that stocks in the future will earn even as much of a premium over bonds as they have in the past. Erb notes that, over the past 90 years, the stock-over-bonds premium has been in a distinct downtrend.
Between 1926 and 1980, for example, an all-stock portfolio gained an average of 1.7 percentage points more a year than a 60/40 portfolio. Since then, the annual premium has been 0.8 point.
Might stocks today nevertheless have the potential for a hefty premium over bonds going forward, since interest rates are so low? William Bernstein, co-principal of Efficient Frontier Advisors, a money-management firm in Eastford, Conn., says he doubts they will, since the stock market is itself overvalued right now according to various valuation measures. He estimates the market is 25 percent to 30 percent overvalued, citing the cyclically adjusted price-to-earnings ratio made famous by Yale University professor Robert Shiller.
Robert Brinker, editor of Bob Brinker's Marketimer, a top-rated advisory service, says he is impressed by the consistency with which a balanced portfolio has captured the bulk of an all-stock portfolio's returns. He presented a study in 1997 comparing the historical returns of both portfolios, he says, and in the 17 years since then their relative returns have been almost exactly the same as before.
As a result, he says, those approaching or in retirement "should not even think of keeping all your money" in stocks. He says the same advice applies to younger investors, if you "are the type to get panicked out" of stocks during bear markets.
What percentage of your retirement portfolio should you invest in equities if you are young and have the rare discipline to stay put through bear markets? Financial planners often use one of several rules of thumb to answer this question, such as setting the equity percentage equal to 120 minus your age. Yet Brinker warns that there is a "huge subjective element" when applying such formulas.
There also are a number of mutual funds that automatically reduce your stock holdings and increase your bond holdings as you approach retirement. But these target-date funds often charge a fee above and beyond those of the funds in which they invest.
Index funds make it easy and inexpensive to manage the process yourself. The most popular intermediate-term bond fund, among those advisers monitored by the Hulbert Financial Digest who have beaten the S&P 500 over the past 15 years, is the Vanguard Intermediate-Term Investment-Grade Fund (VFICX), which charges annual expenses of 0.20 percent, or $20 per $10,000 invested.
The largest exchange-trade fund benchmarked to the S&P 500 is the SPDR S&P 500 ETF Trust (SPY), with a 0.09 percent expense ratio.
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VIDEO ON MSN MONEY
I invest the money I need to get through retirement in bonds. I invest money in stocks for my grandkids. And when they or their parents piss me off, I sell some of those stocks and spend it too.
"Don't go overboard when deciding how much of your portfolio to put into stocks.That advice is particularly timely now, as memories fade of the 2007-09 bear market"
Well seeing how Global Debt has Soared 40% since then and we really haven't solved any of our Problems, putting faith in Bonds is just as foolish. Over the long Run, folks really need to STOP depending on the Past. We are clearly in uncharted territory. The past isn't a promise for the future, it never has been. It's the long run that's in Dire Straits.
So rich, so very rich.
Quotes from hillary Clinton's senate floor speech preceding HER VOTE FOR WAR.
"Now, I believe the facts that have brought us to this fateful vote are not in doubt." (Hmm NO DOUBTs about the facts)
"It is clear, however, that if left unchecked, Saddam Hussein will continue to increase his capacity to wage biological and chemical warfare, and will keep trying to develop nuclear weapons." (It is clear .... )
"When Saddam blocked the inspection process, the inspectors left. As a result, President Clinton, with the British and others, ordered an intensive four-day air assault, Operation Desert Fox, on known and suspected weapons of mass destruction sites and other military targets." (No!, say it is not true, Bill and Hillary Clinton believed so firmly that Saddam had WMDs that they bombed the crap out of the sites? But hey, Bush lied about WMDs)
"And perhaps my decision is influenced by my eight years of experience on the other end of Pennsylvania Avenue in the White House watching my husband deal with serious challenges to our nation."
"So it is with conviction that I support this resolution as being in the best interests of our nation."
CONVICTION --- BEST INTEREST OF THE COUNTRY.
But hey, not one Democrat supported the action ... right? How Orwellian is this crap, how drunk are the American people on Media Soma (read Brave New Worlds). WOW!
It didn’t happen all at once, but the dream that was the United States of America, the Great Republic, has died. Other countries hostile to the idea of true freedom didn’t cause it; it wasn’t caused by a radical religious organization. The downfall of the United States was all from within its own borders, by its own people. The people, for whom others have died, have allowed the country to die a slow death. The me too, me first attitude that started many years ago, along with the idea that all are entitled to the fruits of others hard work, has allowed this country to bleed to death. When the British raised the tax on tea, our forefathers should have just shut up and paid the tax. Almost 240 years later, what has changed? Thousands have died for absolutely nothing.
Who said Saddam had WMDs?
President Clinton orders attack on Iraq in 1998
“Earlier today, I (Bill Clinton) ordered America's armed forces to strike military and security targets in Iraq. They are joined by British forces. Their mission is to attack Iraq's nuclear, chemical and biological weapons programs and its military capacity to threaten its neighbors…
“Other countries possess weapons of mass destruction and ballistic missiles. With Saddam, there is one big difference: He has used them. Not once, but repeatedly.... "
Well, Bill Clinton did.
See also Hillary Clinton's Senate floor speech about her having "done her own due diligence ... and she knew Saddam would never give up his WMDs"
So who lied about WMDs?
Anyone look into alternative investments? I found this one and it seems pretty interesting: www.equivestadvisors.com/investment/life-settlement-investments/
Why own stock?
Why do we own stock? If a company does not pay you part of the profits why own the stock at all? Do we own stock in the hope that someone will pay more for it later? Why should they? The idea that a stock is worth something because the company makes money is flawed. The only way that makes sense is if they pay you a dividend. Without a dividend the stock is worth nothing more than the paper it used to be printed on. If a company goes out of business, are you going to see any money from that investment? Are you going to see any money from the assets it sells? Unless you own enough to be involved with running the company, stock is only worth what someone else is willing to pay for it. It's that simple.
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- A stronger dollar index weighted on the commodities space today.
- Dec gold and Dec silver fell deeper into negative territory, trading as low as $1263.10 per ounce and $19.11 per ounce, respectively.
- Unable to gain momentum, both metals settled with 1.7% losses, with gold closing at $1264.90 per ounce and silver closing at $19.16 per ounce.
- Oct crude oil fell below the $93 per barrel level. It trended lower after pulling back from a session ... More
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