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Don’t abandon bonds

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 Broad stock market indexes hit record highs in the first three months of 2013, and the Standard & Poor’s 500 Index returned a hefty 10%. But even with reasons to remain bullish on stocks for the long run, Steve Giles said in a Money Talk Video that investors should not desert bonds in their portfolios. Here is a transcript of the video.

When the stock market is going through a period of over-performance, people question why they even have bonds.

We have to remind investors that balance is first and foremost. As much as we are attracted to the returns that stocks can generate at times, we have to remind ourselves that bonds are there for risk reduction and protection of principal.

Stocks and bonds beat to different drummers. The reason why we have bonds in our portfolios is because of their low correlation to stocks. When you go through periods of stock market correction, it’s nice to know that another asset class – bonds – provides a low correlation to offset what may be a bad period for the stock market.

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When the stock market goes down, it’s nice knowing that we’ve set aside for investors five-, six-, seven-, eight years’ worth of portfolio distributions no matter what the stock market does.

A balanced portfolio gives a client the confidence to feel comfortable taking money out during periods of market weakness.

If all your money was in the stock market and we saw a pullback the only way for you, as an investor, to take advantage of attractive valuations in the market and buying things on sale is to sell another one of your stocks.

Longer term, there’s always going to be the upside in stocks. Longer term, you’re always going to get that appreciation that comes with being an investor in the market. But in the short term, the bonds prevent us from making decisions irrationally. Emotionally, we can be driven by fear and greed, and that fear of losing money in your portfolio is why the bonds help to prevent us from making a decision that we may regret later.

Steve Giles is vice president at Landaas & Company.

Money Talk video by Peter May

(initially posted April 15, 2013)

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