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17
J
ust because markets drop doesn't
mean your portfolio has to. Simple
investment strategies can help you
build a portfolio that can withstand
a few bumps in the market.
Hedge fund managers and other
professional investors use sophisticated
tools such as options-sector rotation
strategies to limit downside risk.
Individual investors generally build in
bump resistance by changing the asset
allocation of their portfolios to include
more bonds and other income-generating
investments.
"A key feature about bonds, particularly
government bonds, is that they tend to
lose less value than stocks when markets
fall," explains Kendrick Wakeman, CEO
of Boston fi nancial-education company
FinMason. Allocating more of your
portfolio to bonds increases downside
protection.
For instance, Wakeman says that in
2008, when the market fell sharply, a
portfolio of 70 percent stocks and 30
percent bonds would have lost 28 percent
of its value. A portfolio of 70 percent
bonds and 30 percent stocks, however,
would have lost just 2 percent.
There is a cost to including more bonds.
Although they generally resist downdrafts
better, bonds also produce lower returns
than stocks over the long haul. Over several
decades, stock market returns, including
changes in share prices and dividends,
have averaged more than 11 percent.
