Regardless of how you decide to invest, you have to take on risk
For investors, volatility can be scary. And stocks are always going to be much more volatile than more conservative investments like bonds. But when deciding whether a portfolio with only a small allocation to stocks or none at all is right for you, it's important to examine other risks that may not be as obvious.
The No. 1 reason many investors may choose to avoid stocks is because they get emotional about their investments, says
On the other hand, the reasoning for allocating a small portion of your portfolio to stocks is two-fold. Historically, stocks have outperformed bonds, and research shows that diversification lowers risk. The latter may not sound intuitive, but over time, investing in a combination of stocks and bonds actually reduces the overall risk of your portfolio. "We would never propose a portfolio for any investor, no matter how conservative they are, that is completely devoid of stocks," says
From the beginning of 1976 through the end of June, an all-bond portfolio invested entirely in the Barclays Capital U.S. Aggregate Bond Index -- the most commonly-cited investment-grade bond index -- would have returned less and exhibited more risk (as measured by its standard deviation) than a portfolio with a 5 percent allocation to the
Put another way, if you had invested
Over time, a stockless portfolio would struggle to outpace the rate of inflation -- the rise in the price of goods and services over time. For ultra-conservative, fixed-income investors,
To compete with inflation over time, investors have several options. But these alternatives each have their own fair share of risks:
These bonds come with higher payouts, but also higher risks. High-yield bonds are more likely to default than investment-grade IOUs. Investors must also be prepared for a wild ride. In 2008, the average high-yield fund lost about 26 percent, but rocketed back about 47 percent in 2009, according to fund tracker
Emerging markets bonds.
Investors could look abroad to higher growth environments like the emerging markets, where many central banks have recently raised interest rates. While emerging markets may offer higher yields, they are also much less transparent. "You have to be aware of the risks of going into those markets, but you have to take on a little bit of that risk to diversify your treasury portfolio to make sure you aren't concentrating your risk in one asset class," Thompson says.
Rowader says commodities make up an important part of a long-term diversified portfolio. The problem is that there is plenty of volatility in the commodities market as well. "Investors are afraid of stocks, but they do need to consider ways that they can add growth to their portfolio, and commodities is a way to do that," Rowader says. "But I think a lot of people are just as nervous about commodities as they are about stocks."
The bottom line: Regardless of how you decide to invest, you'll have to take on risk in some form.
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