You ask:
"I have 20 years to go until retirement and I am wondering why I should have some money invested in bonds.
I am a sailboat racer. I have learned that the best way to be a winner, is to carefully observe what winning skippers are doing and follow their example.
Becoming a winning investor is similar. When I have a question about investing that I am not sure about, I follow the advice of investment authorities:
The American Association of Individual Investors featured "A Consensus View Among the Experts". They tabulated the recommendations of; The Vanguard Retirement Investing Guide; The T.R.Price Retirement Planning Kit; The Wall Street Journal Guide to Planning Your Financial Future; and Random Walk Down Wall Street. Not a single one of these recognized authorities recommended less than 15% bonds in any portfolio--even "High-risk and young investors".
Benjamin Graham, said that no portfolio should have less than 25% in bonds or more than 75% in stocks.
Jack Bogle recommends, as a starting point, that bonds should about equal our age.
Bill Bernstein: "Most investors are simply not capable of withstanding the vicissitudes of an all-stock investment strategy."
Evenson Asset Management: "We had a thirty-eight year period when bonds outperformed stocks (1802-1839)."
Jane Bryant Quinn: The 47 year average return of a 100% stock portfolio was 12.8% with a worse annual loss of 26.5%. Adding 20% bonds reduced return 0.2% and reduced loss 23.0%--an excellent trade-off.
Peter Bernstein: "In real world experience, investors with smaller allocations to stocks, and with some (bond) anchors to windward, have been the one's most likely to be the winners over the long-haul."
Many mutual fund companies, after careful analysis and sophisticated computer simulations, have introduced life-cycle funds. To my knowledge, every recommended life-cycle portfolio includes bonds.
Jason Zweig, senior write for MONEY magazine,
is a personal friend of mine and well known to many diehards. This is what he wrote in answer to your question:
Jason Zweig--"Why buy bonds?"
Mr. Zweig wrote that article in December 1999. As usual, he was right:
YEAR...US STOCKS...U.S.BONDS...DIFFERENCE
2000.........-10.57%..........+11.39%..........21.96%
2001.........-10.97%...........+8.43%...........19.40%
2002.........-20.96%...........+8.26%...........29.22%
Why do investment authorities recommend bonds when we all know that over long periods of time stocks have had higher returns than bonds? Here are the reasons I think bonds belong in most portfolios:
1. Is it prudent to ignore investment experts when they are in such unanimous agreement? "No"
2. Stocks have not always outperformed. From 1928-1937 a $10,000 investment in stocks returned $8,298; in bonds, $21,744.
3. It is conceivable that in the future (many think stocks are extremely overvalued) bonds could outperform stocks. Do you want all your eggs in one basket?
4. DFA tracked the returns of various asset classes from 1970-1997. International Small Company stocks had the best average annual return (17.5%). Would you put all your savings in this asset class just because it performed best in the past?
5. From 1968-1984 The S&P 500 had a 225% cumulative return. Gold returned 776%. Past performance does not guarantee future performance.
6. Nearly everyone agrees that as we age, bonds should be added to one's portfolio. Bonds are very difficult to understand. It is very helpful to learn about bonds early.
7. Bonds let you sleep better.
Best wishes.
Taylor
