submitted by Michael Garry, CFP®, JD/MBA, Yardley Wealth Management, LLC
I read something pretty distressing in Jason Zweig’s column in the Wall St. Journal last week. In “Here Comes the Next Hot Emerging Market: the U.S.,” Mr. Zweig wrote that according to Morningstar, investors have pulled $22 billion from U.S. stock funds and added $339 billion to bond funds in the last year.
Those amounts don’t sound like ordinary re-balancing, which we advocate. They sound like many people are still scared to death of stocks and/or are choosing funds by chasing past performance and putting too much money into bond funds.
If you can’t emotionally handle the volatility of stocks, you aren’t alone.
Know, however, that bond funds are not a panacea. Some are risky and will go up and down as much or more than some stock funds.
Because yields are so low, many investors are buying longer-term and junk bond funds to try to bump up their yields. It hasn’t hurt them so far. That doesn’t mean it can’t or won’t. A swift rise in yields just to normal yields might take some of these funds down 20-30%.
How many people piling into bonds do you think realize that?
I’m all for having some bond funds. You might want to have close to half of your investments in bond funds.
Doing more than that is probably not prudent. (We buy short and intermediate-term, investment grade, global bond funds that are hedged for currency risk. They won’t react as negatively to a swift rise in interest rates as the bond funds in the last paragraph.)
Figure out your appropriate asset allocation and re-balance to it regularly.
Piling all of your money into stocks or bonds can be a risky strategy, though the numbers suggest that many people are acting without a strategy.