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Neighbors of Kane County

Mixing it up

Nov 04, 2015 10:17AM ● By Neighbors Magazines
by John Masus

In my last three articles I’ve talked about three different investment objectives including Income with Capital Preservation (approximately 20/80% stocks to bonds), Income with Moderate Growth (approximately 40/60% stocks to bonds) and Growth and Income (approximately 60/40% stocks to bonds). As you can see all of these objectives required a mixture of stocks and bonds in various proportions within the portfolios.

So let’s put this thought to work with regards to the recent pullback in late August when the stock market got very scary. When stock markets are falling that means more people are selling than buying and then it becomes a herd mentality at times. Why be part of the herd? During the scary times it’s nice to have good brakes when driving a speeding car. The speeding car being the stockmarket and the brakes being bonds.
n all equity portfolio always seems great in good times but unfortunately we have to deal with good and bad. Sometimes, when the market plays submarine, we get out after substantial downturns, eat our losses and get back in when we feel better about the market direction, usually when it’s higher.

However, by the time we get back in, the train may have already left the station and we may miss the biggest part of the recovery. So we ended up selling in the pits and buying back
in when we feel better, which could mean we sold low and bought high.

Bonds can help to even out the downturns so the ride is not as scary. As a result we may hold off selling at inopportune times. Let me give you some historical facts to illustrate.

In 1974 the S & P 500 (SPX) Index* dropped 22.6%. Ouch! In 2008 a drop of 41.7%. Double Ouch! Bonds, as represented by the Barclay’s Aggregate Bond Treasury TR Index**, were up 6.5% in 1974 and over 7% in 2008.

What does that tell us? It should tell us that there may be a place for bonds in an investment portfolio when striving to smooth out the ride. When the ride is smoother we may have less of a tendency to jump ship at the wrong time. If we look at those two years again, a 50/50 scenario represented by a split between the SPX Index and the Barclay’s Aggregate
Bond Treasury TR Index in 1974 would have had a loss of about -8% and in 2008 the loss would have been about -17%.***

Bonds may help soften the blow. I should say out of transparency that I have also witnessed bonds going down along with stocks. What does that tell me? Probably, that we don’t
have a foolproof formula for success but at the same time bonds may prove to be a good brake petal in that speeding car.

In summary, when I was younger, I liked fast cars and fast…nahhhh. I don’t think I’ll go there. I’ll just stay with the cars.

Now that I’m married with children and grandchildren, I want a little more safety. A good car. Yes, one that has power when I need it but one that also has good brakes when I need them. Like everything else, it’s two sided.

Have a great day!

John Masus is an LPL registered Principal with clients in 24 states. You can email or visit our website at The opinions in this material are for general information and not intended to provide specific investment advice for any individual. 
* S&P 500, Market Watch statistics 6/2015 
** Barclay’s Aggregate Bond Treasury TR 
*** 50/50 Combined Indexes
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. 

Barclays US Aggregate Bond Index is market 
capitalization weighted that includes Treasury
securities, Government agency bonds, Mortgage backed bonds and Corporate bonds. It excludes Municipal bonds and Treasury Inflation-Protected securities because of tax treatment.

All indices mentioned are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.