Allocating Funds Between Stocks and Bonds

We have just gone through a severe recession during which many people lost a large chunk of their investments. Investors are now taking all kinds of precautions and one of the things that you may be considering is whether they should completely give up on stocks. And even if you continue to invest in stocks, how do you know when to get out of the market?

It is understandable that no one wants to be caught off guard again. But I do not think that it is a good idea to give up your stock investments every time you hear of a crisis. First of all, there will always be some people who will predict that another crisis is just around the corner. It is largely guess work, and more often than not they are wrong.

For example, there is no reason to stop investing in stocks merely because of an oil leak. There are so many factors that influence prices of stocks and you don’t have to worry about every single event that takes place. You have to differentiate important financial events from irrelevant ones to be able to make good investment decisions. If you keep giving up your investment every time you see a red flag, it will harm you in the long run as you wouldn’t give your portfolio any time to grow.

Instead of constantly shifting from stocks to fixed income and then back to stocks, you should allocate a part of your money to stock funds and a part of it to fixed income. Then, you should hold on to your investment without panicking on talk of crisis. Allocate the money depending on how much risk you are ready to take. Stocks funds are good for higher returns and bond funds give higher security.

You should stop trying to over optimize your portfolio as it is not practical to keep your investment in the most profitable assets at all points of time. Don’t keep shifting your investment on the basis of small changes in economic conditions because you will also incur a switching cost every time you do that.

Divide your money wisely and you will be safe in crisis conditions too because of the diversification in your portfolio. Even when one asset is doing badly, your investment in the other asset would be safe. This is a much better strategy than arbitrary guess work.

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