Sunday, June 17, 2007

Bonds? What are they good for?

So I was reading this great Ben Stein article, and he mentioned that he has no bond holdings in his portfolio. Instead he has 20% of his money in cash, i.e. money market funds, CDs, etc.

I read somewhere that there has never been a 10 year period where the average return on bonds has been better than the average return on stocks. This seems to imply that if you are investing for 10 years down the line or more (as I am), you should not own bonds.

Right now I have no bonds in my portfolio, but as I start investing outside of my 401K, I am torn between the feeling that I need to diversify in case stocks tank, and by my concern that I would be sinking my long term rate of return. I am not sure what investment vehicles out there are better positioned as a hedge against a falling stock market.

My plan right now is to invest around 10% of my portfolio in tax-free municipal bonds, which make sense given my temporary high income tax bracket. The question I have is:
Is this small risk hedge worth the drag on my total rate of return?


Jon said...

From what I've read, yes. Having an asset allocation plan like "10% bonds, 90% stock" makes you disciplined with buying and selling. When your stocks are way up, you sell some and buy bonds. Then when your stocks go down, you sell bonds and buy stocks.

If you rebalance too often, then you drag down your return. But if you do it on a longer schedule, there's a good chance you can increase your long term return.


Treasury securities are a very unsafe place to put your money. I would prefer investment grade corporates