Investors Boost Bond Stakes Despite Stock Gains

NEW YORK (TheStreet) - Since stocks hit bottom in March, investors have been gaining confidence, withdrawing more than $300 billion from money-market funds and putting the cash to work. Much of that money has gone into top-performing bond funds.

During the first seven months of 2009, $25 billion poured into the PIMCO Total Return Fund(PTTAX Quote), according to Morningstar(MORN Quote). That was a huge inflow for a fund with $169 billion in assets. Other funds that attracted more than $4 billion in assets include the TCW Total Return Bond Fund(TGLMX Quote), Vanguard GNMA Fund(VFIIX Quote) and Vanguard Short-Term Investment-Grade Fund(VFSTX Quote).

Many investors dumped value funds that had sunk when financial stocks collapsed. Stock funds that have suffered withdrawals of more than $2 billion include American Funds Washington Mutual(AWSHX Quote) and Fidelity Value(FDVLX Quote).

The average 401(k) account now has 45% of its assets in fixed income, up from 31% in 2007 and 28% in 2000, according to Hewitt Associates(HEW Quote), a human resources consultant. Are investors racing into bond funds at the wrong time? Perhaps. But some financial advisers argue that nervous shareholders may need to raise their bond allocations.

In recent years, plenty of investors held more stocks than they could tolerate, says Larry Swedroe, research director of Buckingham Asset Management, an investment adviser in St. Louis. When markets collapsed in February and March, shaky investors panicked and sold near the bottom.

If you dumped stock funds at the low, should you shift gears and buy now that the markets are recovering? Probably not, Swedroe says. Those who couldn't tolerate the downturn need to develop suitable allocations. Investors who buy too many stocks now may panic again during the next downturn.