Related links
-
IN THIS PACKAGE
- Insurance offers travel peace of mind
- Budget toys to wow tots
- Age the wrong gauge for portfolio allocations
- Ten ways to build momentum and achieve your goals
- COBRA may fill insurance needs if taking Social Security disability
- Cruz
- Getting Started
- Spending Smart
- Leckey
- Futures trading: Likelihood of huge losses, not tax concerns, should be first consideration
- The Week Ahead
The stock market is like an unreliable friend.
Even if it's affable and generous this year, you're wary if it squandered most of your money last year.
Market volatility has a number of investors questioning just how much more excitement they can accept from their portfolios.
"Right now, a lot of folks feel they'd have a hard time accepting the same kind of experience they had with equities in 2008," said Marilyn Capelli Dimitroff, certified financial planner and president of Capelli Financial Services Inc. "They came to understand just how volatile stocks can be."
The basic midrange formula for personal portfolios traditionally has been 60 percent stocks and 40 percent bonds, based on a belief this provides the ability to keep up with inflation with some cushion. Percentages are adjusted according to an individual's risk preference, the types of stocks and bonds, and the investment time frame.
The question is whether last year's trauma will shrink or eliminate stock holdings. Most financial experts say tossing out stocks would be a huge mistake.
"While we've had a wake-up call, nothing has changed, because a solid strategy takes into account all possibilities of market performance, including bubbles and crashes, since that's what happens in stock markets," said Tom Jacobs, co-founder and portfolio manager for Complete Growth Investor (completegrowth.com). "In fact, after a crash like we had, it's more important to stay the course because we're even less likely to have something of that magnitude again."
Tradition dictates that you start with a higher percentage of stocks when younger, switching more into bonds on the way to retirement. But that belief has lost some steam.
"Age is probably the least relevant factor in considering how much an individual should have in stocks," said Harold Evensky, certified financial planner and president of Evensky & Katz. "Even someone 65 years old could have another 20 years to go."
Two 65-year-old couples might have the same size portfolios but different allocations based on whether they have pensions, how much they spend and their risk tolerance, Evensky said.
"To base everything in a portfolio on a person's age is just ridiculous," said Dimitroff, who agrees that overall situations matter more. "Older people have a shorter time for their portfolios to recover, but young people have such high cash needs that a higher equity allocation might not be so smart for them."
Besides, there is danger in believing a shift into bonds means you're safe, Dimitroff said. Bonds can have considerable risk, especially when you're starting with historically low interest rates, and inflation could well be looming. For existing 30-year bonds, a 1 percent increase in interest rates could lower their value by as much as 15 percent, she said.
In addition, high-yield bonds perform more like stocks, Dimitroff said, and are quite different that Treasurys, corporates or municipals.
"Our basic belief is the domestic and world economies will continue to grow, and stocks will earn more than bonds," said Evensky. "You need to start with a philosophy or belief, but if you need a 5 percent real rate of return, you're not going to get it in bonds and will in stocks."
The stock portion could be stocks, stock mutual funds or exchange-traded funds. Evensky likes ETFs because they are cost-efficient and tax-efficient, which makes a difference in long-term results. The bulk of your money for stocks should be used to buy the stock market as cheaply and tax-efficiently as you can, he said.
An individual's portfolio should contain some "defensive value" stocks, said Jacobs. In that group he'd include ConocoPhillips (COP) because it is the largest natural gas producer in the U.S. and Exxon Mobil Corp. (XOM) because it has the largest energy reserves and a pristine balance sheet.
"You're not going to light the world on fire with these names, but you're not going to get hurt either," said Jacobs.
The aggressiveness of your portfolio is up to you, but the consensus is that stocks still deserve a place in the mix.
E-mail Andrew Leckey at yourmoney@tribune.com.
Even if it's affable and generous this year, you're wary if it squandered most of your money last year.
Market volatility has a number of investors questioning just how much more excitement they can accept from their portfolios.
"Right now, a lot of folks feel they'd have a hard time accepting the same kind of experience they had with equities in 2008," said Marilyn Capelli Dimitroff, certified financial planner and president of Capelli Financial Services Inc. "They came to understand just how volatile stocks can be."
The basic midrange formula for personal portfolios traditionally has been 60 percent stocks and 40 percent bonds, based on a belief this provides the ability to keep up with inflation with some cushion. Percentages are adjusted according to an individual's risk preference, the types of stocks and bonds, and the investment time frame.
The question is whether last year's trauma will shrink or eliminate stock holdings. Most financial experts say tossing out stocks would be a huge mistake.
"While we've had a wake-up call, nothing has changed, because a solid strategy takes into account all possibilities of market performance, including bubbles and crashes, since that's what happens in stock markets," said Tom Jacobs, co-founder and portfolio manager for Complete Growth Investor (completegrowth.com). "In fact, after a crash like we had, it's more important to stay the course because we're even less likely to have something of that magnitude again."
Tradition dictates that you start with a higher percentage of stocks when younger, switching more into bonds on the way to retirement. But that belief has lost some steam.
"Age is probably the least relevant factor in considering how much an individual should have in stocks," said Harold Evensky, certified financial planner and president of Evensky & Katz. "Even someone 65 years old could have another 20 years to go."
Two 65-year-old couples might have the same size portfolios but different allocations based on whether they have pensions, how much they spend and their risk tolerance, Evensky said.
"To base everything in a portfolio on a person's age is just ridiculous," said Dimitroff, who agrees that overall situations matter more. "Older people have a shorter time for their portfolios to recover, but young people have such high cash needs that a higher equity allocation might not be so smart for them."
Besides, there is danger in believing a shift into bonds means you're safe, Dimitroff said. Bonds can have considerable risk, especially when you're starting with historically low interest rates, and inflation could well be looming. For existing 30-year bonds, a 1 percent increase in interest rates could lower their value by as much as 15 percent, she said.
In addition, high-yield bonds perform more like stocks, Dimitroff said, and are quite different that Treasurys, corporates or municipals.
"Our basic belief is the domestic and world economies will continue to grow, and stocks will earn more than bonds," said Evensky. "You need to start with a philosophy or belief, but if you need a 5 percent real rate of return, you're not going to get it in bonds and will in stocks."
The stock portion could be stocks, stock mutual funds or exchange-traded funds. Evensky likes ETFs because they are cost-efficient and tax-efficient, which makes a difference in long-term results. The bulk of your money for stocks should be used to buy the stock market as cheaply and tax-efficiently as you can, he said.
An individual's portfolio should contain some "defensive value" stocks, said Jacobs. In that group he'd include ConocoPhillips (COP) because it is the largest natural gas producer in the U.S. and Exxon Mobil Corp. (XOM) because it has the largest energy reserves and a pristine balance sheet.
"You're not going to light the world on fire with these names, but you're not going to get hurt either," said Jacobs.
The aggressiveness of your portfolio is up to you, but the consensus is that stocks still deserve a place in the mix.
E-mail Andrew Leckey at yourmoney@tribune.com.
