Stocks vs. Bonds: What's Better in a Rocky Market?

×
Confusion, indecisionInterest rates are falling for Treasury bonds, beloved for their safety and steady payout. The stock market is wobbling, and equity prices may fall further if the economy continues to weaken. Since most portfolios contain an element of both asset classes, what's an investor supposed to do now?

It may seem like there's nowhere to turn. Interest rates on 10-year Treasurys, the kind retirees like to sock away in their portfolios, have fallen from 3.84% at the beginning of the year to 2.72% now. The S&P 500 is down 1.11% for the year, but off nearly 11% from its 52-week high.

As a result, investors are clearly confused about what to do. Data from mutual fund researcher Lipper FMI showed a huge outflow of $11.5 billion from equity funds at the beginning of July, but nearly $8 billion was plowed back into stock funds at the end of the month. Meanwhile, bond funds have shown a steady increase, gaining $18 billion in July alone.

Be Sure to Rebalance

Joanna Beswick, portfolio manager at mutual fund giant Fidelity Investments, says investors should resist the temptation to jump out of fixed-income holdings simply because rates are falling. "I'm not sure its wise to change your long-term asset allocation due to short-term market conditions," Beswick says.

But with a long-term plan in place, Beswick says it makes sense to rebalance the portfolio when it gets out of whack due to market fluctuations, as we've experienced recently. Thus, if a portfolio is allocated to 50% stocks and 50% bonds, when the stock market swoons and that balance changes, it makes sense to use fixed-income money to buy equities, she says.

"Those dips in the equity market become a buying opportunity to move the overall plan back to a 50%-50% allocation," Beswick says.

But that doesn't mean investors should be content with the low yields on Treasury bonds. Beswick says the fixed-income portion of a portfolio should be as diversified as the entire portfolio and should include such things as higher-yielding junk bonds and emerging-market debt.

Dividend-Paying Stocks Can Beat Bonds

Lawrence Carrel, author of Dividend Stocks for Dummies, says current market conditions raise the appeal of high-dividend stocks.

"In a volatile environment, where the stock market can go down and bonds are paying extremely low interest, a good place to beat the rate of return on bonds is dividend stocks," Carrel says. "If you can get potential upside in your investment at a yield that is 60% to 100% better than the 10-year Treasury, why wouldn't you take it?"

Carrel suggests stocks like Verizon (VZ), which is yielding 6.29%; utilities like Integrys Energy Group (TEG), which yields 5.68%; or the Utiities Select Spider Fund (XLU), which yields 4.10%.

Carrel likes the fact the even in a declining market, high-dividend stocks have some upside potential. "The thing about dividend stocks, like any income investment, is that even if the market falls, you continue to get income on your investment no matter where the market is going," he says.

Then There's Gold

Brian Kelly, president of Darien, Conn.-based investment adviser Kanundrum Capital, says he has given up on both stocks and bonds for the moment. ""I don't think the risk-reward is there," Kelly says. "Bonds have moved significantly, and you're not getting paid very much for that. Stocks have tremendous headwinds."

The outlook for equities was darkened on Tuesday when the Federal Reserve's interest-rate setting committee issued a downbeat forecast about growth in the country. Economic data coming out of China and Europe also indicated a slowdown is taking shape.

Kelly says he's investing in gold at the moment. He sees two factors supporting gold: the fact that countries around the world, including the U.S., are trying to boost exports by depreciating their money against other currencies. With a fluctuating value, gold tends to rise as the dollar depreciates. Kelly also says central banks are buying gold for the first time in 20 years.

The price of gold, at around $1,216 per ounce, is up about 11% this years, but off its high of $1,271.

Kelly says he's less inclined to look at other precious metals like palladium and platinum because their prices are closely linked to automobile production -- and the car industry may be facing a speed bump because of the slowing economy.

Increase your money and finance knowledge from home

Investor’s Toolbox

Improve your investing savvy with the right financial toolset.

View Course »

Basics Of The Stock Market

Stock Market 101 - everything you need to know but were afraid to ask!

View Course »

Add a Comment

*0 / 3000 Character Maximum

38 Comments

Filter by:
aucreations

to all of you out there ,the world populatin only going to increase . more people, especialy in the third world, means only pressure on gold . with paper money printed in vast ammount , and economies are in the mud, buy gold forget stocks or bonds , gold is the only safe place to be,all those experts are only trying to fool you, either they dont get it or they are pimps for the gov, or wall st.

August 15 2010 at 3:16 PM Report abuse rate up rate down Reply
humbl14u

Sad truth is the reds have stood opposed to everything. How can a president win back an economy with a wall of ignorance before him? History will judge. W destroyed, the blues must rebuild.

August 15 2010 at 2:31 PM Report abuse -1 rate up rate down Reply
James Young

How about this for a quick understanding of what happened and what's going to happen. In 1980 jobs began to leave the country. In order for folks to maintain their same standard of living at that time the government made credit easy to access. Remember all the recessions we had. Easy credit was our escape back to the economic dream. As service jobs payed less we turned to our credit cards. We did that all the way to 2008. As banks crashed so did a lot of those people's dreams. Here we are now, personal debt is still high and not dropping, jobs are disapearing, boomers are pulling back and planning for retirement, and the credit system is in shambles.
Whats coming? Inflation. too much debt and too much printed money to pay for it. Higher interest rates. Hang on to assets their value will rise. We will have a housing shortage somewhere in the next couple years. Get educated. That will help you find a decent paying job. The stock market will bounce like a ball but trading ranges will be 10600 to 11000 in 2010. 11000 to the high 11000 in 2012. High 11000 to 12000 in 2013. 12000 to 13000 from 2014 to 2015. Some where in these estimates there will be a major correction. Inflation will help to shrink the devestating impact of all the debt. Those who are educated will see their pay rise with inflation and those who are not will suffer. Watch out for the next big crises in about 15 years. What to do with an aging baby boom gereation. Nursing homes will be full and hospitals won't be able to meet the care for all them. Time to be frugal. Learn to live with less. The go-go times are gone for at least the next eight years. Plan accordingly.

August 15 2010 at 1:15 PM Report abuse +2 rate up rate down Reply
1 reply to James Young's comment
Brattie

You are one heck of an extremly intelligent man! Awesome blog and that my friends, is truly the whole picture. Run for President Mr. James Young. You will have my vote.

August 16 2010 at 9:26 AM Report abuse rate up rate down Reply
davidrpriest

Buy Long Term Bonds at your own risk! Interest rates cannot go any lower. When they go up, bonds will get killed. For every 1 percent increase in rates, bond price go down 10%! Don't buy bonds unless you are holding them to maturity or buy TIPS and hold them to maturity. You should be in Stocks, Commodities, REITS and Cash depending on your age and risk tolerance. Hang in there America, he be gone in two years. After every Carter, there is a Reagan. Buy stock if you have a long horizon and a strong stomach!

August 15 2010 at 10:18 AM Report abuse rate up rate down Reply
Iselin007

Don't drive outside your gated communities the people are really sore at you Wall Street crooks.

August 14 2010 at 6:43 PM Report abuse -1 rate up rate down Reply
kamdajani

xxx

August 14 2010 at 1:40 PM Report abuse -1 rate up rate down Reply
parishmp

As usual the pros are so far behind the curve that if you follow them they will kill what little you have left in your 401K or IRA. Look that told you to hang on to your high tech stocks in 2000. They told to to hang with big cap stocks a few years ago. If you had listened you'd be broke. Want to buy stocks that pay high divdends. Go ahead BP was paying 6.25% when their stock price was at 62 now they not only eliimnated the divdidend but the stock is selling at 38 and change. Yes, the bond market interest rates are down but bonds don't work like stocks. If you purchased a Bond fund as the interest rates dropped the Bonds went up in price so your Bond fund is now worth a ton in comparison to what it was three years ago. Of course they aren't telling you that. In 2003 the pros told you the only safe haven was real estate. If you followed there advise and both a house to rent as an investment or a summer home or simply bought a house much bigger than you needed because they told you values would go up. You're probably under water with your mortgage if you havent already lost the house to the bank. Whatever they tell you run don't walk the other way!!

August 14 2010 at 11:12 AM Report abuse +4 rate up rate down Reply
1 reply to parishmp's comment
ryand408

I love your comment. Right on the money. I wonder why these idiots go to school to get Masters and PHD's for. I know you don't need a Master or PHD to give bad advice hehehe.

August 14 2010 at 6:44 PM Report abuse rate up rate down Reply
mornewz

6 more years of O'Babble?

August 14 2010 at 9:55 AM Report abuse -2 rate up rate down Reply
grangrand

The blog reacting to Obama's speech supporting the mosque near ground zero is burning up . .I would love to slap him about now.

August 13 2010 at 10:48 PM Report abuse +7 rate up rate down Reply
Richard

cash in a jelly jar, buried in the back yard is best !

August 13 2010 at 10:29 PM Report abuse +5 rate up rate down Reply