This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Why It May Be Time to Dump Bonds

Stocks in this article: FKINX BERIX EVBAX INTC DD JSOAX

NEW YORK ( TheStreet ) -- In a recent annual report, Harvard's endowment crowed about its investment performance. During the 10 years ending in June, the portfolio returned 9.4% annually, topping the S&P 500 by two percentage points.

The solid returns can be attributed partly to the shrewd use of private equity and hedge funds. But the Harvard endowment also succeeded because it has been lowering the allocation to bonds and increasing exposure to equities and alternative investments. Since 2008, the bond allocation fell from 15% of assets to 9%.

That has been a winning move recently as stocks soared while bonds languished.

Harvard is not alone in shifting away from bonds. According to Wilshire Associates, the median public pension fund has only 25% of assets in bonds, and many institutional investors are moving away from fixed income. Institutional investors figure that bond yields are puny, and returns could suffer if rates keep rising. When rates climb, bond prices fall. "Many institutions are worried about the prospects for high-quality fixed income over the next three to five years," says Steve Foresti, a managing director of Wilshire.

Should individual investors join the migration from bonds? Yes, say some managers of balanced mutual funds. The funds hold mixes of stocks and bonds, and lately the managers have been shifting away from fixed income. Franklin Income (FKINX) has lowered its bond allocation from 52% of assets in 2011 to 32% this year. Berwyn Income (BERIX) moved from 35% of assets in bonds in 2011 to 21% now.

Eaton Vance Bond (EVBAX) aims to deliver income. To accomplish the goal, portfolio manager Kathleen Gaffney now has 14% of assets in stocks. Gaffney says the puny yields on Treasuries and other high-quality bonds don't compensate for the risk that rising rates could erode principal. Eaton Vance holds blue-chip dividend stocks, including Intel (INTC) and E.I. du Pont (DD). "Dividends can be a great source of stable income," says Gaffney. "You can find good companies at attractive valuations that are growing their dividends."

But not everyone is applauding the move away from bonds. Fran Kinniry, a principal of Vanguard Group, cautions it is extremely difficult to predict when rates will rise. Investors who try to time the next rate move may get it wrong. Instead of aiming to time the markets, most investors should develop long-term asset allocations and stick with them, Kinniry says. "Just because rates are low does not mean that they will go higher," she adds.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs