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William Lowry and Teri Gonzales-Lowry made it a point not to overreact during the bear market of 2000-2001. With the help of their financial planner, Jeffrey Hammond, the two Chicago-based nonprofit executives decided to stay the course they set for themselves years ago. While Teri’s portfolio, which emphasizes stocks and stock funds, can withstand more risk because of a longer time period until her retirement, her husband, William, has a more conservative portfolio because he plans to retire soon. His basic allocation is 60% in bonds and 40% in stocks.
“A few years ago, I was tempted to put more money into stocks,” says William, 66. “Everybody seemed to be making so much money in stocks that I thought I was losing an opportunity.” Instead, he stuck with his bond-heavy portfolio, which he describes as “moderate growth and income.” After watching the equity markets suffer two disastrous years in a row, he’s glad he did.
“The people who made that money in stocks gave it all back,” he says. “I might have had a small loss last year, but there were many people who were down 30% or 40%.”
Hammond says last year he repositioned some of the Lowry’s assets, putting more of their money into bond funds. However, since he believes interest rates may begin to climb this year, he’s reluctant to add more bonds to William’s portfolio.
The Lowrys illustrate the value of using bonds to diversify a portfolio, thus, minimizing market risk. William’s investment in bonds enabled him to minimize his losses during a down market and protected his resources for his retirement. But you don’t have to wait until retirement to take advantage of a bond’s ability to buffer market volatility.
“Bonds should be about 10% to 15% of an aggressive portfolio,” says Dale Bryant, portfolio manager at The Bryant Group in New York City. “In addition to U.S. Treasuries, investors should also think about corporate bonds and municipal bonds.”
Younger people can also use bonds to their advantage (see, “Bond Investing for Young People,” www.black enterprise.com). Even though she has more time before retirement than her husband, Teri Lowry, 46, still has a significant exposure to bonds. Her portfolio is made up of 65% stocks and 35% bonds, and all the interest generated from the bonds is reinvested rather than spent.
Hammond has Teri invested in short-term and intermediate-term bond funds that typically deliver higher yields than money market funds. Holding the bond funds diversifies her portfolio and decreases her overall market risk, keeping her year-to-year results from varying wildly. And Hammond says Teri also has the choice to move into municipal bond funds, which can produce tax-free income.
“Past performance never guarantees future results,” says Hammond, “but at least we have the positioning to take advantage of almost any situation that the market throws at us.”
UNDERSTANDING THE VALUEOF BONDS
“Bonds are essentially a loan or purchase of debt from corporations, municipalities, or the government,” explains William Landers, an investment advisor for the New York City-based WPL Financial Services. “The issuer promises to