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Investing: Stodgy bonds take the lead from stocks

With the Barclays Capital U.S. Aggregate Bond Index up 10.1 percent since Dec. 31, 2007, bonds are no longer just a defensive play.

Many investment strategies call for a portfolio that’s heavily weighted in stocks, with bonds thrown in for a bit of protection, said Sam Mamudi in The Wall Street Journal. But now some experts recommend flipping that formula on its head—or at the very least giving bonds equal play. “Even if stocks deliver higher returns over time than bonds, the difference may not be large enough to justify the often higher volatility of stocks.” After all, even counting this year’s recovery, the Standard & Poor’s 500 is down 30 percent since Dec. 31, 2007. The Barclays Capital U.S. Aggregate Bond Index, meanwhile, is up 10.1 percent. “Stocks definitely haven’t been pulling their weight.”

In fact, some advisors have dubbed corporate bonds “the new stocks,” said Reshma Kapadia in SmartMoney. They offer the “same or better return for less risk,” says Bruce Berkowitz, manager of the Fairholme Fund, which invests in both stocks and bonds. Even sleepy Treasury bonds have “seen a crazy run-up in the wake of the crash.” Given their stock-like returns, bonds aren’t just reserved for playing defense anymore. Yet, as with stocks, investors should spread their risk across different types of bonds—including foreign government debt, corporate debt, and Treasurys. It’s also a good idea to “ladder” your bonds so they’re not all set to mature at once. Include short-term and intermediate-term funds in your portfolio.

Mom-and-pop investors seem to be catching on, said Al Yoon in Reuters. Since mid-March, they’ve put more than $153 billion into bond portfolios—three times as much as they’ve added to equity portfolios. “There is a revolutionary rethinking of how people invest,” says Michael Kastner, senior managing director at Sterling Stamos in New York. But those new to the bond market should be aware that its highflying days may be numbered. “Fixed returns from bonds have been largely buoyed by two decades of falling interest rates as global competition and dollar strength has kept inflation low.” Currently U.S. interest rates are close to zero, but they’ll have to increase eventually—and there’s a big risk that rising rates will put an end to fixed income’s reign.

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