As investors, we want to put our money in a place where it is safe yet works for us. It’s especially difficult to find the balance when the investment markets move hundreds of points in a single day and sometimes within a single hour. Even more financially depressing is the reported lost decade for stocks, the idea that over the past 10 years, no money has been made for buy and hold equities investors.
If you have had a substantial portion of your investment dollars in stocks like Apple, Amazon, or Green Mountain Coffee, your lost decade hasn’t been lost at all but for those who have a substantial portion of money invested in index funds, they know all too well about the lost decade. Less than five years ago bonds, preferred stock, and other fixed income holdings were barely given a second look by growth investors but all of that has changed in less than five years. Is a portfolio with a much higher weighting of fixed income investments the best move right now? Here are four reasons why the answer may be, yes.
You don’t have to be up in your years to remember a time when the happenings of economies on the other side of the globe were barely on your radar screen. What was happening in European nations was barely a consideration even when investing in multinational companies. Today, most sophisticated investors can name the financial decision makers in the Euro area nations and when the Greek Parliament votes on an economic proposal U.S. markets move.
This heightened globalization in the world’s investment markets has made it much more difficult for investors of all skill levels to find stocks that consistently move based on the fundamentals of the underlying company. Bonds offer the opportunity of a set income much more independent of market conditions.
Better Retail Payout
It’s true that stocks offer a potential for growth that is much higher than fixed income but for retail investors, those that don’t invest as a career, finding the right stocks and holding them through wild swings in the market has proven difficult. The five year performance for the retail investor is in the red for 8 out of 10 people which makes the 4% or higher return on highly rated corporate bonds quite attractive.
For many, their retirement funds are invested in a funds that are largely made up of actively managed mutual funds and because their employer may match a portion of their contributions, keeping the funds in these fee laden funds makes sense and is also required. For those with an IRA where the funds don’t have to be invested in mutual funds, bonds offer the same advantages without the large fees. Sure, there are the advisor’s fees if you use one, commission, and later, taxes, but those fees are still much less than some mutual funds.
Cash isn’t much of an investment but if you’re an active stock market investor, making nothing while market conditions are unstable is better than losing money. There are three types of positions that an investor can take: Long positions, short positions, and no position. All of these have their place in an actively traded portfolio.
Active traders don’t like fixed income because they aren’t as exciting as stocks and ETFs but chasing the wild market swings isn’t profitable for most investors on a longer term basis. Every portfolio has room for some fixed income.
(Photo: thewalkingirony )