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Keep Your Balance While Investing By S&P Financial Communications |
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Maintaining a portfolio with a mix of stocks and bonds that suits your risk tolerance and time horizon, a practice known as asset allocation, has been a fundamental tenet of investing for a long time. Although asset allocation does not assure a profit or protect against loss in a declining market, investors who base their investment strategy on a target asset allocation may find it easier to stick with it when the stock market experiences significant ups and downs.
A recent study from Vanguard sheds light on how this notion can work. In a survey of 2.7 million IRA investors between the beginning of 2007 and October 2009 -- a time when the U.S. stock market experienced considerable volatility -- those investors who owned one balanced fund, which included both stocks and bonds, were 50% less likely to abandon their stock investments when compared with those who owned equity funds but no balanced funds.1
One reason for this behavior may be that the balance of stocks and bonds helps investors avoid significant losses. Stocks and bonds historically have not moved in tandem in response to economic or market developments, although past performance does not guarantee future results.
Points to Consider
When deciding on a target asset allocation, it may be helpful to consider your risk tolerance and time horizon. Stocks historically have exhibited more short-term ups and downs compared with bonds and other more conservative investments.2 Because of this historical trend, a larger allocation to stocks may be appropriate for those who plan to remain invested for the long term and who can tolerate short-term swings in value. Those who may need to access their money in the short term may want to consider a greater emphasis on more conservative investments with the goal of preserving principal.
In addition, feelings about risk also come into play. Some individuals are uncomfortable with investment risk, which is the possibility that the value of their portfolio could decline. Historically, many investors with a low tolerance for investment risk have allocated a larger portion of their portfolios to bonds or cash investments. It's important to remember, though, that these more conservative investments also carry some risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.
Risk is part of investing, and it's important to understand the potential upside and the potential downside of every investment. That said, a balanced portfolio, either with one balanced fund or with a mix of funds designed to pursue a target allocation, may help you stay focused, even when Wall Street seas are choppy.
1 Source: "Vanguard Research Finds Investors Stayed with Stocks During Decline; Showed Little Appetite for Adding More During Rebound," Vanguard, March 4, 2010. Investing in stocks involves risk, including potential loss of principal.
2 Sources: Standard & Poor's; Barclays Capital. Stocks are represented by the S&P 500, investment-grade bonds by the Barclays Capital Aggregate Bond Index. Results are for the 20-year period ending December 31, 2009. Past performance does not guarantee future results.
© 2010 Standard & Poor's Financial Communications. All rights reserved.
© 2010, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement
Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.
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