I read something pretty distressing in Jason Zweig’s column in the Wall St. Journal recently. In an articled entitled Here Comes the Next Hot Emerging Market: the U.S., Mr. Zweig wrote that according to Morningstar, investors have pulled $22 billion from U.S. stock funds and added $339 billion to bond funds in the last year.
Those amounts don’t sound like ordinary re-balancing, which we advocate and do all of the time.
They sound like a lot of people are still scared to death of stocks and/or are choosing funds by chasing past performance and putting way too much money into bond funds.
If you can’t emotionally handle the volatility of the stock market, you aren’t alone. Know, however, that bond funds are not a panacea. Some are very risky and will go up and down as much as or more than some stock funds.
Because yields are so low, I’ve also seen many stories about investors buying longer-term funds and junk bond funds to try to bump up their yields, and it hasn’t hurt them so far. That doesn’t mean it can’t or won’t. A swift rise in yields just to more normal yields might take some of these types of bond funds down 20-30%. How many people piling into bonds last year do you think realize that?
I’m all for having some bond funds in almost everyone’s account. If you are retired or close to it, you might want to have close to half of your investments in bond funds. Doing more than that, especially now, is probably not very prudent. (We buy short and intermediate-term, investment grade, global bond funds that are hedged for currency risk. They won’t react anywhere near as negatively to a swift rise in interest rates as the bond funds in the last paragraph.)
You need to figure out the appropriate asset allocation for you, and re-balance back to it on a regular basis. Piling all of your money into stocks or bonds can be a very risky strategy, although the numbers from Morningstar seem to suggest that many people are acting without a strategy.