Comment Posted to “A Balanced Approach: Less Risk, But Lower Potential Return,” by Stuart Ritter, CFP, in the December 2011 AAII Journal:
There is plenty of commentary demonstrating the risk-dampening effect of bonds. That is because bonds increase in value when stocks decline, largely because interest rates fall when the economy is suffering. However, my concern has to do with the situation moving forward. With interest rates at historic (and probably unsustainable) lows, it seems that bond investing is much riskier today and over the course of the next decade. Stocks may or may not rise, but it seems that interest rates have only one way to go, which would cause bond values to decline, perhaps sharply. Just food for thought: Is this commentary relevant, considering the bond market of today?
John from Texas
Stuart Ritter responds:
A couple of issues to keep in mind related to the reader’s points about bonds and the economic environment:
It’s important to keep the above in mind when considering the role bonds play in a portfolio. Stocks and bonds don’t always move in opposite directions, and rarely by exactly the same amount. Historically, bonds have provided a lower average return with lower variability. Holding bonds in an otherwise pure stock portfolio has dampened the volatility an investor would otherwise experience—and this historical reality should still be taken into consideration when constructing a portfolio.
Comment posted to the First Cut column, “Greenblatt’s Magic Formula,” by John Bajkowski in the December 2011 AAII Journal:
This is a nice summary of Joel Greenblatt’s book. I read the book, and there is very little to add beyond your article. I think this is a good shortcut to estimating company value. But I would hesitate to follow the investment advice. There are probably several reasons why this could be viewed as inadequate; I shall list two:
Wesley from New Mexico