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The Best Investment You Can Make Today

As we look back on the stock market's recent "lost decade," one investing lesson we learned (or should have learned) going forward is that owning a portfolio of just equities can, in fact, be a bad thing.

Sure, equities have historically been the best-performing asset class over the long term, but since we all have finite time horizons that reluctantly shrink with each passing year, we can't count on rolling 50-year returns when we may only have 10 years to retirement.

As we witnessed last year, one abnormally bad year can set your savings back a full decade -- and sometimes the damage is irreparable. The emotional by-products of such a terrible year of performance -- desperation, anger, capitulation -- often only compound the problem.

Fortunately, you don't have to risk it all in equities to comfortably build yourself a sizable nest egg. In fact, the remedy is quite simple: Own more bonds. It's the best investment you can make today.  

Bonds? Seriously?
On the whole, American investors of all ages don't own enough bonds. A 2008 survey from the Investment Company Institute revealed the scary truth:

Bond Portfolio Share

Investors < 40 years

Investors 40 to 60

Investors > 65 years

More than 50%

3%

4%

7%

31% to 50%

7%

7%

12%

11% to 30%

20%

28%

22%

1% to 10%

31%

25%

25%

0%

38%

35%

34%

Source: ICI.org.

While you might expect younger investors to have less fixed-income exposure, incredibly, nearly a third of investors 65 and older still have no bond exposure whatsoever -- and more than 80% of them have allocated less than 30% of their portfolio to bonds.

Based on this data, then, it's no surprise that it's been a very rocky year for investors of all ages, but particularly for seniors already in or quickly approaching retirement.

It didn't have to be that way
While bonds are much less exciting than stocks, dedicating a portion of your portfolio to bonds shouldn't be seen as boring or cowardly -- that is, unless you really enjoy seeing large chunks of your portfolio evaporate in a year.

Consider the success realized by the Vanguard Wellington Fund (VWELX) over its rich 80-year history. Since its launch in 1929, Wellington has always held between 30% and 60% bonds in addition to stocks (currently it's a 62% stock / 38% bond mix). According to Vanguard, it "has historically provided more than 80% of the return of the U.S. stock market with less risk."

At the fund's 75th anniversary in 2004, Vanguard founder Jack Bogle noted that Wellington's original objectives of "conservation of capital, reasonable current income, and profits without undue risk" have "stood the test of time."

Indeed they have. From July 1, 1929, through the end of 2008, Wellington has posted incredible 8% annualized returns -- far more incredible when you consider the bubble in which it was born and the Depression in which it subsisted for the next 10 years. To put that success into further perspective, the Dow Jones Industrial Average has grown a paltry 4.1% since Wellington's inception.

Even in the most recent decade, Wellington has continued to more than hold its own against Vanguard's flagship S&P 500-tracking 500 Index (VFINX):

Timeframe

Wellington

500 Index

1 Year

(22.3%)

(35.3%)

3 Year

(1.1%)

(11.4%)

5 Year

2.8%

(4.5%)

10 Year

4.5%

(1.5%)

Source: Vanguard.com, as of Dec. 31, 2008.

What's its secret?
Wellington's ability to consistently generate solid returns with less risk speaks volumes about the need for both stocks and bonds in your portfolio.

The stocks in the Wellington fund are generally large, mostly U.S.-based, dividend payers. Among the current top stock holdings, you'll find names like:

Company

% of Assets

AT&T (NYSE: T  )

2.7%

Chevron (NYSE: CVX  )

1.9%

ExxonMobil (NYSE: XOM  )

1.8%

IBM (NYSE: IBM  )

1.5%

Eli Lilly (NYSE: LLY  )

1.4%

General Electric (NYSE: GE  )

1.0%

Wal-Mart (NYSE: WMT  )

1.0%

Source: Vanguard.com, as of Dec. 31, 2008.

Pairing these blue-chip dividend stalwarts with investment-grade corporate, Treasury, government agency, and yes, some mortgage-backed security bonds gives the fund's owners the best of both worlds -- the capital growth of stocks with the capital-preserving qualities of bonds. With a balanced approach like this, you may not beat the market in up years, but you won't lose as much in down years, either.

Word is bond
Keeping the past year's volatility in mind, there's truly something to be said for smoother returns, and owning more bonds can help you achieve this objective.

But before you rush out on your quest for bonds, remember that, like the stock market, the bond market can be complicated. In fact, the U.S. bond market is almost twice the size of the U.S. stock market, so before you dive in, it pays to not only know what percentage of your portfolio to allocate to bonds, but also what type of bonds you'd want -- high-yield "junk," TIPS, investment-grade, etc. For the average investor, your best bet is to gain bond exposure through bond-based mutual funds and ETFs.

At our Motley Fool Rule Your Retirement service, advisor Robert Brokamp has created model portfolios consisting of both stocks and bonds for investors of all ages. If you'd like to learn more about the ways bonds should fit in your portfolio, consider a 30-day free trial to Rule Your Retirement. Just click here to get started -- there's no obligation to subscribe.

Todd Wenning is a proud supporter of the Chico's Bail Bonds little league baseball team. He does not own shares of any company mentioned. Wal-Mart Stores is a Motley Fool Inside Value selection. The Fool's disclosure policy pays interest daily.


Read/Post Comments (4) | Recommend This Article (42)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 24, 2009, at 10:56 PM, homework72 wrote:

    Luckily, with just a few years prior to retirement, we have placed 50% of our 401-K's in mutual fund bonds which saved us from double digit losses in 2008.

  • Report this Comment On January 25, 2009, at 9:57 PM, madmilker wrote:

    The Best Investment You Can Make Today is to buy Congress a set of ba!!s. If it is in the Congressional record tat "we the people" (Congress) can buy back the Federal Reserve for a mere $450 million dollars...print interest free money.

    The $11.5 trillion of U.S. debt could be exchanged dollar for dollar with U.S. non- interest bearing currency when the debt becomes due. There would be no inflation because there would be no additional currency in circulation. Personal income tax could be cut if we bought back the FED and therefore, the economy would expand. According to the Constitution, Congress is to control the creation of money, keeping the amount of inflation or deflation in check. If Congress isn't doing their job, they should be voted out of office.

    The late Thomas A Edison explained the matter of issuing currency this way: "If our nation can issue a dollar bond (interest bearing) it can issue a dollar bill (interest-free). The element that makes the bond good makes a bill good also. The difference between the bond and the bill is that the bond lets money brokers collect twice the amount of the bond and an additional 20 percent, whereas the currency pays nobody but those who contribute directly in some useful way. It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay: But one promise fattens the usurers (interest collectors) and the other helps the people."

    IN 1935 THE SUPREME COURT RULED THAT CONGRESS CANNOT CONSTITUTIONALLY DELEGATE ITS POWER TO ANOTHER GROUP.

    Rothschild, a London Banker, wrote a letter saying "It (Central Bank ) gives the National Bank almost complete control of national finance. The few who understand the system will either be so interested in its profits, or so dependent on its favours, that there will be no opposition from that class... The great body of the people, mentally incapable of comprehending, will bear its burden without complaint, and perhaps without even suspecting that the system is inimical (contrary) to their interests."

    In 1913, before the Senate Banking and Currency Committee, Mr. Alexander stated: "But the whole scheme of a Federal Reserve Bank with its commercial-paper basis is an impractical, cumbersome machinery, is simply a cover, to find a way to secure the privilege of issuing money and to evade payment of as much tax upon circulation as possible, and then control the issue and maintain, instead of reduce, interest rates. It is a system that, if inaugurated, will prove to the advantage of the few and the detriment of the people of the United States. It will mean continued shortage of actual money and further extension of credits; for when there is a lack of real money people have to borrow credit to their cost.

    Well....wit America over $54 trillion in debt tat $450 million to abolish the FED is jus a drop in tat bucket but can only be done if Congress has a set of ba!!s.

  • Report this Comment On March 31, 2009, at 1:25 PM, tomd728 wrote:

    madmlker,

    Rise up man !!!!!!!!!!!!!!!

    I wanted to post up but you nailed it.

    'Nuff said and rock on.

    Tom

  • Report this Comment On May 28, 2010, at 5:17 PM, JTROCHELMAN wrote:

    I have seen this 'Factoid' a thousand times . " The US Congress has the option to buy back the FED at $450 millions (per Congressional Records) "

    Per what Congressional record ? It NEVER appears to be referenced any further then the above statement. From my limited research I have only been able to access Congressional records from 1994 till the present. If anyone can be of assistance it would be greatly appreciated. I am a serious researcher, however, this alleged documentation has been very elusive.

    Jtrochelman@Earthlink.net

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