Bail (Out) Bonds: Some Bond Funds Could Ease Your Pain
It didn't have to be this bad. You could've had bond funds in your portfolio.
Many of the TMT (technology/media/telecom) stocks that breathlessly pushed the market to such stunning heights are now back to where they were a year ago. Last Wednesday I looked at what you might do to rebalance your equity portfolio and reduce risk going forward. Today, let's walk through the argument for including bond funds in your portfolio, which might make sense for even the most aggressive and long-term investors.
|Other Junk |
Time to Weigh Your Tech Exposure and Consider |
|Climate is Changing For Net Bellwether Stocks|
|10 Questions With Merrill's Paul Meeks|
Here's the short version: Putting a modest portion of your portfolio in bond funds will reduce your portfolio's volatility more than it reduces its returns over time.As great as this sounds, investors have taken a pass on bonds, which have historically returned less than stocks. After all, in 1999 the Wilshire 5000 index -- a broad measure of stock market performance -- gained more than 20% for a fifth-consecutive year, 180 stock funds posted gains of more than 100% and the average tech fund rang up a 135% gain. It doesn't help matters that bonds had one of their toughest years in recent memory in 1994, when rapid-fire interest rate hikes made outstanding bonds less attractive.
Stocks' solid run in the 1990s gave investors little reason to look at bonds.
|Source: Stocks represented by the Wilshire 5000 index, bonds represented by the Lehman Brothers Aggregate Bond index. Performance through Nov. 21.|
|Bond Funds' Flagging Fan Club |
In the tail end of the 1990s the number of bond fund accounts flatlined, while stock fund accounts skyrocketed.
|Source: Investment Company Institute.|
|A Tradeoff |
Yes, stocks outperform bonds, but they can smooth out stocks' volatility too.
|Source: Morningstar. Data through Oct. 31.|
Junk PileMaybe this value-style comeback is for real. Last week, Merrill Lynch analyst Bill Katz lowered his earnings estimates on several asset managers, including Stilwell Financial (SV), which is primarily comprised of growth-fund titan Janus funds. Among the asset managers Katz still liked was Franklin Resources (BEN). Why? Because of Franklin's bent toward the value investment style and the strength of its -- surprise, surprise -- bond funds. And remember last year when the average Janus stock fund gained more than 80%? This year only one Janus stock fund is above-water since Jan. 1 ( (JAGLX)Janus Global Life Sciences), and it's closed to new investors.
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