I know they say to stay the course if you are young. But we are in a recession. I would put some into bonds no matter what age I was under these conditions. Looking out a few years, it looks ugly. About the only way interest rates can go is up. Most of my friends are staying pretty close to home with $4-$5 gas. Think what that is going to do to corporate profits. From what I have read, the housing problem is not over yet. Are people still spending money? Of course. But I think they are being more selective. I hope I am wrong and the market turns around. I hate being pessimistic about financial matters.
I know that investing in something that's going down at the moment may seem counter-intuitive, but you need to look at two things (maybe you already have, but I'll post them here so that others can see):
1. You mention "young", so I assume that you have a large time horizon before you need the money. All the more reason to invest in equities. No asset class has surpassed the equities for overall ROI. Sure, bonds may beat them some years, but if you look at a 25-year time horizon, you'll get a greater return from the equities.
2. Bonds help preserve your capital, but they generally don't earn more than 3-5%. You need more interest than that so that you can beat inflation over the long haul. You want to be able to put in $100k over your life span and cash out with $900k (and I'm only using these numbers as examples - my point is that you want the compounding interest from the equities, not the principal from the bonds).
3. Hard assets (such as a house) have been the traditional wealth-building mechanism for middle-class America for years. The housing bubble has burst, and now we're into declining housing values. Have they bottomed out? Probably not, but remember how we were all hootin' and hollerin' about how we doubled our house value in 4 years? That's not happening anymore. A hard asset like a house typically ran about 4-5% per year. 25% per year was outrageous! Yet, let the tech bubble that burst, we all saw that as the new paradigm. When banks started making money easier to obtain, it created artificial demand for properties, and that led to too many dollars chasing the same amount of properties. That led to bidding up of housing values to an unobtainable level. Now they're coming back to a reasonable level.
Yes, people are paying $4-$5 per gallon of gasoline. Yes, they may be staying closer to home for vacations this year. The bottom line is - people will still spend money. The money that was spent leading up to this recession was fueled with home equity loans from increased property values. Now that money has dried up. It doesn't mean that people won't buy cars - it means that instead of a BMW, they may buy a Honda, etc.
Bottom line in my opinion - holding equities as the major asset class in your portfolio when you have a long time horizon is a good thing. On paper it doesn't look good right now because they're declining, but through dollar cost averaging you're getting more shares for your money.
.I'm staying the course with 100% stock funds until I make my loses back (I have 25 years to retirement, it has to rebound, right?
). I'm hoping this occurs before my 40th birthday at which time I plan to ease up on the stocks and put a little in cash and bonds (like 15-20%) at first.
. Its like I'm wishing my life away
