Should I invest in bonds or stocks when financial markets are so volatile? A better question should be: Should that question even be asked?
As any finance major freshman would point out, the key to a solid portfolio is diversification, diversification, and diversification, just like real estate professionals use location as the main factor.
No one size fits all, just as no single financial strategy can become the holy grail of investing, as investment decisions heavily depend on personal situations. Different age groups lean toward different investment strategies, and risk tolerance is by far the major determinant of investment decisions. Thus, the ratio of bonds vs. stocks in any particular portfolio can vary greatly, with personal expectations and views of possible future world events directly influencing the mix.
In light of today’s turbulent and uncertain economic conditions, historical data may not be a suitable precursor to future events.
U.S. Treasuries returned breathtaking capital gains in 2011, almost 30% in the long term category, but this extraordinary performance will most likely not be repeated in 2012. Klipinger’s Personal Finance noted that this runup was triggered by panic buying rather than fundamentals, as global investors were seeking to shelter themselves from possible calamity. The consensus now is to avoid long term bonds of any type and stick with intermediate bonds as a hedge against possibly rising interest rates if the U.S. economy starts rising again, as half of surveyed economists believe it will in the second half of 2012. Bond index funds heavily weighted in quality bonds are highly recommended in case investors do not want to try to forecast the direction of interest rates, while municipal bond funds can also offer a tax advantage.
In the event stocks are preferred, a good place to start is demographic trends. As the global population continuously grows, more food will be consumed, more energy will have to be produced to manufacture the additional food, just as more people will get wired, and people in emerging markets will drive more cars. Therefore, companies with a global reach will most likely have an advantage. Remember that the term large U.S. companies can be a misnomer in today’s world, a better description is that they are global companies with a large U.S. presence.
By and large, foreign stocks have lost their appeal lately, caused mainly by the European crisis that has had a negative impact on the economies of emerging countries. Nevertheless, as one money manager stated, he is underweighted in Europe, but overweighted in Germany. Specific regions can still retain their allure.
To put things into perspective, the question of should I invest in bonds or stocks is easily answered. Both.