Am I missing something? (fixed income vs. growth)

[hotwired]

I am going to research this further, but it's occurred to me to question the validity of investing in stock market so much when a sensibly assembled and maintained portfolio of bonds--high yield, corporate and government, coupled with good preferred stock and maybe some stalwart, high yielding common stock would be the preferred method.

I mean, this question really comes up when I look at the results I've achieved with my ROTH (down nearly 50% from it's peak earlier this year - of course, this represents 3% of my total portfolio and it's where I make all my mistakes, investing on my own, thinking I'm the next Peter Lynch) - not to mention the results of the S and P, and all the world markets.

Is this really necessary?? Is this REALLY a risk we need to take to achieve a long term but gut wrenching 9% vs. a steady 6-7% with a MUCH safer approach I have always wondered why someone wouldn’t assemble a portfolio of higher yielding stocks, mixed with preferred etc. to get a nice stable 6-8% - as long as they’re invested in the individual securities, there’s no chance of losing principal other than default risk, which can be diminished, in fact nearly eliminated, by diversification.

So here's my thoughts: for the next 1-2 years, keep things where they are. I truly believe that the Dow and S and P will climb, led by the financial sector eventually, and maybe energy ... and the japanese and other asian markets. From there, once we've enjoyed a good "bump," I will start moving my ROTH ENTIRELY to fixed income or high div paying investments. We will have our Financial Planner move from Growth and Income to Income and Growth. We have a financial planner who holds around 80% of our money while I mange the other 20%, so I can "tweak" the mix even further toward the income side.

Anyway, that's it for my rambling! This is just one of those questions that I've realized has been burning inside for years, but I've either not sought the answer with enough vigor, or I've not recieved the answer ...

[tangomonster]

Been wondering the same thing, HW! I agree. I'd gladly forfeit a couple of percentage points and sleep at night.

But be careful with those corporate bonds! Ironically, in the fixed income portion of my portfolio, the only two I have are GMAC and Goldman Sachs! You can imagine how they are both tanking.....

And I think it will take more than one to two years for stocks to recover even a little....

[dex]

Quote:

Originally Posted by hotwired So here's my thoughts: for the next 1-2 years, keep things where they are. I truly believe that the Dow and S and P will climb, led by the financial sector eventually, and maybe energy ... and the japanese and other asian markets. From there, once we've enjoyed a good "bump," I will start moving my ROTH ENTIRELY to fixed income or high div paying investments.

There are several things wrong with your thinking - others can point them out.

Let me just put a bug in your mind about your plan.
1. World bank rates are trending towards 0%
2. When economy/stock market recovers and you sell stocks to buy bonds; as in your plan above - you will be buying bonds when interest rates will begin to rise.

So when you buy the bonds you will be getting lower rates then now and then the principle will begin to decline when world banks begin to raise their rates.

[plex]

Um, Dex, if HW bought bonds instead of stocks right before a recovery, HW would lose a LOT of money...the recovery of the stocks will produce a much higher return than the difference in bond rates. That is the whole point of bonds, they have lower volatility and are not directly correlated to stocks.

HW, most people are not 100% stocks, unless they are very far from retirement, either just starting out with building their net worth or have a 30-year horizon. After that, experienced individual investors start taking a certain % of bonds (how much they take is individual). The closer the FIRE date draws near, the less time you have to completly ride out the stock market waiting for the recovery, which is why most people have the greatest actual need for bonds right near their retirement date.

[dex]

Quote:

Originally Posted by plex Um, Dex, if HW bought bonds instead of stocks right before a recovery, HW would lose a LOT of money...the recovery of the stocks will produce a much higher return than the difference in bond rates. That is the whole point of bonds, they have lower volatility and are not directly correlated to stocks.

I'm not sure what you are saying - but I don't think it is different from what HW said in his/her plan or from what I said.

[fisherman]

This kind of discussion is one of the many benefits of this board. I was actually looking into something similar. This is uncharted territory for me so I really appreciate any and all info and I hope this question will add to the discussion on this thread.

BAC.PR.L is Bank of America preferred class L Convertible stock. Current dividend yield is 10.2%. It is callable 11/2013. what say the experts?

[hotwired]

Hi
Thanks for the responses! To add a little more detail, my thoughts are that if I could NOT find a decent, well diversified 6-8% yield, I wouldn't go for it anyway (this is in response to Dex' first response) - I guess what I'm going through, as I age and become a more "seasoned" investor is that the "reality" of things doesn't always match up with the "Money Magazine" portrayal of how things should work out. I would heartily take 6.5% over 8% over even FORTY years if I did not have to endure any 30% losses. Perhaps myopic, perhaps not.

What I like about the income vision vs. the mostly stock vision is partly psychological too, like paying your mortgage off might not be the best "financial" move, but if it gives you great peace of mind, so be it. By this I mean, if I'm looking at holding SOME stocks, for dividends only, let's say the dividends give me $3,000 per month - then I'm much less apt to worry about a 10-20% decline, because I've done my homework, these stocks are good strong, and have low payout ratios, and I'll get my $3,000 per month whether the stocks rise 5% or drop 20% (in a perfect world).

Also, as a bit of a deviation, I'm having GREAT luck in prosper.com - very diversified -- 73 loans of $50 each for average yield of 12.65% - one loan is late. I simply find the best loans I can in the A or AA grade. They're in a quiet period right now, so not taking new money yet ... but one more way to diversify. Of course, you have to factor in reinvesting ... you get back a portion of your principal, not just interest, so there's some complicated math involved to figure your REAL total return, but if you constantly reinvest in new loans each month, it should work out.