The Bear Turns Nasty

At the same time that it’s been feasting on investors’ assets, the current bear market has mauled many of the favorite maxims of investment advisors. Included in the conventional wisdom that’s been overturned by the rampaging bear is the time-honored buy-and-hold strategy, based on the historical fact that, in the long run, stocks go up.

But the long run can get pretty long. It took 25 years before the market regained the level it was at before the 1929 crash. Who knows when the Dow will see 14,000 again?

The key factor in a buy-and-hold strategy is diversification. If most or all of your money is in stocks or stock funds, the past year hasn’t just been painful, it’s been excruciating. A hefty dose of bonds and money market funds may have eased the pain. When the stock market is under siege, the 5% to 6% average annual return on bonds starts to look very good. That doesn’t mean you should dump all your stock holdings and buy bonds. Over the long run, stocks have historically beaten bonds, so the longer your time horizon, the more stocks make investment sense. Plus, if the economy ever gets back to recovery mode, you can expect interest rates to rise, which will lower bond prices. But bonds, as the current climate shows, can help cushion your portfolio against shock.

So instead of buy-and-hold, investors may want to switch their strategy to buy-and-beware. Pay attention; when your portfolio is top-heavy with either bonds or stocks, shift some money into the lighter sector. The particular allocation is up to you and your financial advisor, but with a time horizon of 5 years or more, many financial experts advise a 70/30 mix of stocks to bonds.