The long-term performance of stocks — an annualized return of 9.7 percent since 1926 — is a powerful argument for staying invested in the market. Yes, stocks are volatile. But in all but the most extreme circumstances (like those we saw in 2008), holding bonds and other assets can minimize the damage.
That may sound like the same old investment advice handed out before the crash — and it is. But that doesn’t mean you can’t improve on it. Here are some tips for getting the most out of your asset allocation. This advice applies to a portfolio intended to grow over 10 years or longer and not to any cash you may keep on hand for short-term uses.
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>> Stick with stocks Stocks should account for close to half of your portfolio — even if you’re close to retirement. There’s a better-than-even chance that at least one of a pair of spouses retiring today at age 65 will still be around at age 90, says Ned Notzon of T. Rowe Price. Inflation can ravage a bond-heavy portfolio over that time. That’s why Notzon thinks new retirees should have at least 40 percent of their assets — and preferably 55 percent to 60 percent — in stocks.
>> Don’t forget the rest of the world Non-U.S. companies account for more than half the value of the world’s stocks. They should be represented in all but the most conservative portfolios. Keep in mind, though, that many large companies in the United States and elsewhere operate globally. That means that foreign stocks aren’t as different from U.S. stocks as they used to be and don’t provide as much diversification benefit as they once did. Stocks from developing nations, such as China and India, provide better diversification.
>> Look beyond bonds Alternatives should be simple and have a successful track record. Among those we like: real estate investment trusts, funds that track commodity prices and certain low-risk funds that adopt hedge fundlike strategies. Something altogether different and appropriate for even conservative investors is a fund like Merger (symbol MERFX), which buys shares of firms that are being acquired. During the 2008 disaster, it lost only 2 percent.
>> Rebalance Restore your portfolio’s original allocation by selling assets that have performed relatively well and buying those that have performed relatively poorly — as long as they still make sense for your portfolio. “Rebalancing forces you to sell high and buy low over and over again,” says Jerry Miccolis, co-author of “Asset Allocation for Dummies.” Miccolis recommends doing it whenever your allocation shifts by a couple of percentage points. But weigh the benefits of rebalancing against the cost of commissions and taxes.
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