Since 2009, the bulls have been stampeding in the stock market, leaving investors who shied away after the last bear market with lagging portfolios that may fall short when it comes to funding long-term lifestyle needs.
Those who have languished in the perceived safety of fixed income for the past few years have missed an opportunity to regain lost wealth. To prove it, USA Today ran the numbers: The Standard & Poor's 500 index is up 119 percent since the bull market began on March 9, 2009, making it one of only nine bull markets in the benchmark index's history to post a triple-digit gain.
A little perspective
True, the current bull market, while it looks stunning on paper, is recovering from the worst market beating since the Great Depression. And back in the dark aftermath of the stock market's plunge, there was no certainty that it would eventually enter into a sustained recovery. It has also been volatile enough during its recovery to keep the truly skittish at bay and it will probably continue to be somewhat volatile this year.
But many experts believe that a mostly safe portfolio is not doing investors any favors and fixed income could be the next bubble to burst. In a previous post, Bankrate's senior financial analyst Greg McBride, CFA, notes that inflation and interest rates pose a much bigger risk to fixed-income investors who have piled into what they believe are safe-haven investments. "Loss of purchasing power is just as damaging as a loss of principal and fixed-income investors may likely encounter both in the years ahead," McBride says.
The memory of retirement accounts that plunged by as much as 50 percent during the recession is leaving many people still too frightened to stomach the risk of equities. And that's the thing: To get rich and stay that way, you generally have to take risk. But no one is suggesting a portfolio of 100 percent equities.
Asset allocation is key
Those nearing retirement need to keep a portion of their portfolio in safe investments because they simply don't have the time to make up losses should the market turn bearish again. How much of the portfolio is allocated to equities versus fixed income is a personal as well as financial decision: Determine your own time horizon, how much you are willing to lose in a market downturn and what your long-term versus short-term investment needs are. Then you can allocate your portfolio to allow for growth as well as safety. Bankrate's asset allocation calculator can help.
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