Morningstar readers opine about stocks, bonds, and the importance of not upending your well-laid asset-allocation plans.
By Christine Benz | 06-05-11 | 06:00 AM | Email Article

You've got to hand it to Bill Gross. Although the fixed-income maestro clearly has a vested interest in cheerleading for bonds and has in the past been accused of talking up PIMCO's favored fixed-income sectors in the media, he has recently gone on the record to say that equities very likely offer better future upside potential than bonds--especially Treasuries--right now. Gross said a year ago that bonds had very likely seen their best days, and he reiterated that viewpoint in a Bloomberg TV interview a few weeks ago. When asked if investors should buy stocks instead of bonds, Gross said, "I think so."

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

Have Morningstar users heeded Gross' advice, spurred on by incredible shrinking fixed-income yields and the specter of rising interest rates? That's the question I posed in the Income and Dividend Investing section of's Discuss Forum.

User responses were all over the map, prompting statsguy to write, "I don't know what type of an article you could write that summarizes this cacophony of posts. Good luck." (Thanks for the vote of confidence, statsguy!)

But the posts, though varied, revealed valuable insights about the relative attractiveness of stocks, bonds, and cash. They also showcased a range of opinions about asset allocation, with many users commenting that they stick with their well-laid plan regardless of what the talking heads--or even full-blown gurus like Gross--are saying. Click here to read the complete thread.

Taking on a Little More Risk Seems Worthwhile
Several posters agreed with Gross that stocks' prospects look brighter than bonds' right now, even as they acknowledge that equity valuations are less attractive than they once were.

Poster Kevindow, for example, after noting that investors shouldn't let their asset allocations get buffeted around by the news flow, wrote, "If you look at a scalable chart of  Vanguard Total Bond Market Index ,  iShares MSCI EAFE Index , and  iShares S&P 500 Index, you realize that the bond market has significantly outperformed the foreign equity markets (EFA) and the S&P 500 (IVV) during the past three- and five-year periods. If you believe in reversion to the mean, which is indeed time-tested, then fixed income is likely due for a correction during the next few years.

"So forget about trailing returns, which would lead you to favor fixed income over equities, and realize that interest rates have no place to go but up and that equities, both domestic and foreign, are the place to invest in the next few years."

Poster DuaneJ agreed with that overall viewpoint: "I have the highest allocation to stocks, both in dollars and in percentage of assets, that I've ever had. I think anyone with a time horizon of 10-plus years should be as heavy into stocks as they can tolerate today. We'll be lucky to match inflation with bonds during the next decade, in my opinion."

FidlStix was also planning to maintain a robust equity weighting into retirement, noting, " I expect to hold a 60% equity/40% bond asset allocation into retirement. I know that is considered too risky by many analysts, but as someone who arrived late at the investing party as dessert was being served, taking on a little more risk seems worthwhile."

What a Bizarre Idea
For other investors who posted in the forum, current equity valuations make them inclined to subtract from equities, not add.

Rlovendale wrote, "I've actually decreased my equity exposure recently after the markets have gone up 30%-plus since I started investing last January. I have about 65%-70% equity (a little more than 50% international), 20% bonds (mostly corporate; some mortgage), and 10% cash (held by managers searching for value). Even though I'm only 25, I'd still like to have something to rebalance with should we have another dive. Since I'm starting graduate school this fall and won't have income to contribute to my Roth IRA, I also won't be able to take advantage of dollar-cost-averaging benefits. This was another factor in my decision to be a little more conservative."

BuyerBeWare, while still maintaining a fairly stock-heavy allocation, has also been peeling back. "After the downturn, I did the opposite of what the herd was doing. I bought at a discount by shifting 100% of my investments into equities. I continued to invest 100% in equities. That enabled me to recoup my cost basis and some of the gains lost. Recently, because the market has been on a tear for two years, I established a 17% position in bonds and 5% in cash using the gains I recouped."

Darwinian, never one to beat around the bush, wrote, "Shift into equities now? At a time when the market has been rising for two years? After equities have doubled in price? What a bizarre idea.

"I have had to toil continuously to sell off enough equities, during the past two years, to keep them from taking over my whole portfolio. During this time, I have reallocated from 75% equities (a temporary concession to momentum in the summer of 2009) back to a long-term allocation of 65%. I reached this point early this year and have been holding steady since. May was the first month this year that I did not sell equities. I don't plan on buying anything back until it has dropped at least 25%."

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Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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