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If
your investment portfolio is even
moderately diversified, you probably own
both stocks and bonds. That is a good
idea, because diversification is
essential to your success as an
investor. But you also should know what
to expect from different types of
investments because the more you know,
the more likely you are to make the
right moves.
Unfortunately, some people’s
expectations get distorted due to what
may be happening with their investments.
For example, a couple of years back,
many investors saw the value of their
bonds rise sharply, causing some to look
at these investments as growth vehicles.
But is that an accurate assessment?
Probably not, although some
recent statistics are quite interesting.
From December 1999 through February
2003, long-term government bonds rose
about 13 percent, while the S & P 500 –
one of the most well-known stock market
indices – fell by about the same amount.
This is the second greatest period ever
of superior bond returns relative to
stocks – and one of the few in the past
80 years, a time in which stocks have
consistently outperformed all other
investments.
While you can’t base all
your investment decisions on what has
gone before, it is generally a good idea
not to plan on selling your bonds before
they mature and make a profit. Instead,
plan for what bonds do provide: current
income in the form of monthly or
quarterly interest checks. As long as
you own your bond, you will always
receive the same amount in interest
(assuming the issuer doesn’t default),
no matter how much the bond’s current
value fluctuates.
Many stocks also provide
current income, in the form of
dividends. But if you are like a lot of
people, you buy stocks for their growth
potential. In other words, when you buy
stocks, you anticipate the price going
up, so that when you sell, you can make
a profit.
And, although past
performance is not an indication of
future results, over the long term,
stock prices historically have risen. In
fact, from 1926 through 2005,
large-company stocks provided an average
annual return of more than 10 percent,
while small-company stocks returned, on
average, more than 12 percent, according
to Ibbotson Associates, an investment
research firm. Small company stocks do
fluctuate more than that of larger
companies.
Of course, you cannot assume
that, for a given year, your stocks will
return 10 percent, 12 percent or
anything at all. In the short term,
stocks go down as well as up, so you
should not be shocked at losing
principal over a single year, or perhaps
a couple of years in a row.
But if you buy an array of
high-quality stocks and you hold them
for the long term, at least five to 10
years, you increase your chances to
achieve some growth.
Ultimately, by knowing what
to expect from your stocks, bonds and
any other securities you may own, you
can draw up a long-term investment
strategy appropriate for your individual
needs, goals, risk tolerance and time
horizon. You may want to work with a
financial professional to determine why
you own what you do, what you might
anticipate from your holdings and what
changes you may need to make.
Nobody can predict the
future. But you can plan for it by
having a clear set of expectations,
based on a thorough knowledge of your
investments.
Louis Mullinger can be reached at the
Edward Jones office on Wake Union Church
Road. |
