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Investing in 2018: Stocks vs. bonds

Created date

February 12th, 2018
Graphic image showing balance between stocks and bonds.

Graphic image showing balance between stocks and bonds.

Conventional wisdom used to be that as people got older, they moved assets out of the stock market into more conservative investments like bonds. But the most recent data from the Federal Reserve shows that today’s retirees aren’t necessarily following that guidance. The Fed’s 2016 Survey of Consumer Finances revealed that many U.S. households reduced their equity investments from 2007 to 2016. 

But according to Bloomberg News, during that same period, households headed by someone 75 years or older became more likely to own stocks. In fact, 49% of that age group owned stocks in 2016, as compared to 40% in 2007. That is the highest percentage of stock ownership for retirees since 1989, when the Fed began tracking this data. 

So what does this growth in stock ownership mean? Jamie Hopkins, codirector of the Retirement Income Center at The American College, says it’s likely a good sign—because it shows confidence in the markets and a willingness to take on more risk for higher returns.

“If you look at other investment options today compared to equities, bonds might be riskier as they are paying a much lower return. Interest rates being low for a long time have made bonds and CDs less attractive when compared to equity returns,” Hopkins says. “With a retirement shortfall possibility for many investors, it makes sense to chase higher returns by moving away from low-return assets like bonds and into higher-return assets like stocks.”

Good year for stocks?

If you’re one of the many Americans over age 75 who own stocks, you’re probably wondering what 2018 will bring for the markets. While no one can predict with any certainty, industry experts have plenty of opinions. Hopkins expects 2018 to be a good year for the stock market. While it may not be quite as good as 2017, he says potential corporate tax cuts, low unemployment, solid company earnings, and cheap debt all point to a strong year ahead.

“Additionally, interest rates remain low and are not rising at a dramatic pace, meaning investments will likely continue to flow into equities and not toward bonds for another year,” he says. 

John Anagnos, chief investment officer at Aetolia Capital (aetoliacapital.com), agrees that 2018 will likely be a year of continued growth. While tax reform and an infrastructure bill could be catalysts for growth in the U.S. market, he says investors should also look beyond American stocks. 

“Globally, growth is continuing and we see better opportunities in emerging markets and Europe, which are undervalued when compared to the U.S.,” Anagnos says. 

Florida financial planner Anthony Criscuolo (palisadeshudson.com) reminds investors not to focus too much on their portfolio’s current yield (or income), which is just one aspect of total return. He says some investments in your portfolio, such as dividend-paying stocks or real estate equities, will have a high yield, while others, like high-quality short-term bonds, will have no or low yield but will offer less volatility and more principal protection.

“A good portfolio will be balanced and diversified among various asset classes that provide a total expected return in line with the acceptable level of risk the investor is willing to accept,” Criscuolo says. “This should be equally true for a young investor accumulating wealth and for retirees.”

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