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to the Bond Market?
Most individuals carry an underweighted position in bonds in their investment portfolios. According to a recent poll, the average member of the American Association of Individual Investors has only 9% of his or her portfolio invested in individual bonds or bond funds. This compares with a 64% weighting in individual stocks or stock funds and 26% in cash.
Chart 1
Average Asset Allocation of AAII Members: January 17, 2008
Average asset allocation of members of the American Association of Individual Investors from a poll on the AAII Web Site (based upon members responding).
It is true that the self-selected AAII members included in this poll may be an unusual bunch. Compared to the average investor, for example, they are much more likely to buy individual stocks. Nevertheless, a low fixed income weighting is almost certainly a feature of the typical portfolio of the broader universe of investors.
Most individuals view stocks as their primary investment vehicle. If they are worried about the stock market, they are more likely to shift some of their assets to cash instruments, such as money market funds or bank CDs. Well-heeled investors may also include municipal bonds or municipal bond funds in the mix. But few investors consider the full range of fixed income securities as investment options.
It is unfortunate that investors do not pay more attention to the rest of the fixed income sector. By devoting a higher proportion of their assets to fixed income, I believe that investors can earn solid, inflation-adjusted returns with much less downside risk. In addition, developing financial market trends often show up in the fixed income sector early on; so focusing on fixed income will make you a better stock investor.
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Originally published February 28, 2008
Stephen P. Percoco
Income Builder
P.O. Box 1409
Mashpee, MA 02649
(732) 763-0763
incomebuilder@larkresearch.com
© 2008 Lark Research, Inc. All Rights Reserved. Information is carefully compiled but not guaranteed to be free from error. Specific reference to any specific security should never be construed as a solicitation to either buy or sell. Reproduction without permission from the publisher is prohibited.