Stocks Or Bonds In 2010?

Should you own stocks or bonds in 2010? That's the question that seems to be on the minds of market strategists as we roll into the new year. But if that's the question you're asking, then you're asking the wrong question.

Too often, the people who promote themselves as market strategists see the markets as an "either or" situation. Either you're in stocks or you're in bonds, and you choose based on which one you think will provide the best return going forward. Right now, most of them are saying that you need to be in stocks for two reasons:

• First, stocks have just gone through their worst decade ever, and have lost value for 10 years. Thus, one would think that this long period of under-performance should be followed by some descent gains in the future. That's generally been the pattern in the past and sounds reasonable.
• Second, bond yields are at all time lows, which means in "investor speak" that they are very expensive, and look overvalued. Many don't think it's worth investing in bonds at a 3 percent yield when the stock market may be due for a big pop as the global economy recovers. Plus, bonds have seen record buying in the last year from panicked investors, and when an asset class gets a huge influx of new money, it often doesn't do too well going forward.

Those all sound like great theories, but let me run another great theory by you. Many of the same people who are telling you to own stocks today were telling you the same thing in 1999. I mean, why own boring and low interest bearing bonds when technology is revolutionizing the world? The theory was you could make 25 percent a year in the stock market, so who cares about bonds. And yes, these market strategists had many compelling reasons for thinking this. It's just that they were totally wrong.

That's the point. There's no way to predict the future of the financial markets with any degree of certainty. I mean you can guess, and sometimes you'll guess right and sometimes wrong. But guessing isn't a great strategy for your life's savings. If you recognize you cannot predict the future, then you don't see the stock and bond markets as "either or" decisions. You see them as both providing certain opportunities and costs in your portfolio and generally allocate to both markets.

• Stocks provide opportunities for great gains, but the cost is your exposure to punishing losses.
• Bonds provide income and stability, but the cost is a relatively low rate of return.

If you had followed this balanced discipline in 1999, the bonds would have saved your portfolio from the full brunt of the last two bear markets and provided some consistent income over the last 10 years. And you would have actually made some money.

Today, you wouldn't buy bonds because you think they will beat stocks. Generally, over longer-term cycles, they don't. You buy them because you want a portion of your money to be safe and predictable. That's really the primary reason to own bonds.

For 2010, just like in every year, a healthier approach is to allocate to both markets. If the economy heats up and stocks jump in value, great. Some of your money is in stocks. If bonds creep along at low rates, that's alright because that's supposed to be your safe money. And if the economy tanks again, then you'll be happy you have those safe bonds to shield your life's savings from those declines.

Bottom line. I wouldn't spend much time trying to figure out which market will provide higher returns in 2010. If you take a balanced approach, you'll be sure to be in the market that does.

As with all investment matters, consult your individual financial advisor prior to making any decisions.

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