The Right Mix Make Money But Sleep Soundly

Plunged into doubt?

Amid the recent market turmoil, maybe you are wondering whether you really have the right mix of investments. Here are a few thoughts to keep in mind:

Taking Stock

If you are a bond investor who is petrified of stocks, the wild price swings of the past few weeks have probably confirmed all of your worst suspicions. But the truth is, adding stocks to your bond portfolio could bolster your returns, without boosting your portfolio's overall gyrations.

How can that be? While stocks and bonds often move up and down in tandem, this isn't always the case, and sometimes stocks rise when bonds are tumbling.

Indeed, Chicago researchers Ibbotson Associates figure a portfolio that's 100% in longer-term government bonds has the same risk profile as a mix that includes 83% in longer-term government bonds and 17% in the blue-chip stocks that constitute Standard & Poor's 500 stock index.

The bottom line? Everybody should own some stocks. Even cowards.

Padding the Mattress

On the other hand, maybe you're a committed stock market investor, but you would like to add a calming influence to your portfolio. What's your best bet?

When investors look to mellow their stock portfolios, they usually turn to bonds. Indeed, the traditional balanced portfolio, which typically includes 60% stocks and

40% bonds, remains a firm favorite with many investment experts.

A balanced portfolio isn't a bad bet. But if you want to calm your stock portfolio, I would skip bonds and instead add cash investments such as Treasury bills and money market funds. Ibbotson calculates that, over the past 25 years, a mix of 75% stocks and 25% Treasury bills would have performed about as well as a mix of 60% stocks and 40% longer-term government bonds, and with a similar level of portfolio price gyrations.

Moreover, the stock-cash mix offers more certainty, because you know that even if your stocks fall in value, your cash never will. By contrast, both the stocks and bonds in a balanced portfolio can get hammered at the same time.

Patience Has Its Rewards, Sometimes

Stocks are capable of generating miserable short-run results. During the past 50 years, the worst five-calendar-year stretch for stocks left investors with an annualized loss of 2.4%.

But while any investment can disappoint in the short run, stocks do at least sparkle over the long haul. As a long-term investor, your goal is to fend off the dual threats of inflation and taxes and make your money grow. And on that score, stocks are supreme.

According to Ibbotson Associates, over the past 50 years, stocks gained 5.5% a year after inflation and an assumed 28% tax rate. By contrast, longer-term government bonds waddled along at just 0.8% a year and Treasury bills returned a mere 0.3%.

Source: Jonathan Clements, "The Right Mix: Fine-Tuning a Portfolio to Make Money and Still Sleep Soundly," The Wall Street Journal, July 23, 1996. Reprinted by permission of The Wall Street Journal, © 1996 Dow Jones & Company, Inc. All Rights Reserved Worldwide.

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