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Winter 2016
U.S. government bonds, which are
considered among the safest investments
and virtually risk free, have averaged a
return of just more than 5 percent. Corporate
bonds are better, but still well behind stocks.
The more you emphasize bonds, the
lower your returns are likely to be compared
to a more stock-heavy portfolio, especially
in a rising market. "Like any insurance,
these changes could result in lower overall
performance and an opportunity cost, if
the market performs better than expected,"
says Bob Stammers, director of investor
education for the CFA Institute.
Two factors can help you decide how
much bump protection to build in. First
is the time horizon — how long it will be
before you will need the money from your
portfolio. For retirement savers, this could
be decades. For someone saving up a down
payment on a home, it could be months.
The longer your time horizon, the more
you can afford to keep money in stocks.
Theoretically, over time, fl uctuations in the
stock market will even out and generate
near historical returns.
The shorter your time horizon, the less
you can afford to keep in stocks. That's
because if you need to sell your holdings
when the market happens to be down, it
will have a negative effect on your returns.
Why not just put it all in bonds? You'll
give up a lot of investment return. "A 100
percent government bond portfolio will do
little better than match infl ation over the
long haul," Wakeman says.
