Recent swings in the market have been so overwhelming that some investors are simply incredulous and completely unsure of what to do. A recent report by Aon Hewitt in October 2014 showed that consumers were favoring fixed income or bond funds over equity or stock funds as the “go to” investments for their 401(k) plans, something that many market professionals believe is a bad idea.
The report suggests that, with the violent downsides swing of the stock market recently, the preference for bonds among consumers has become much more evident.
However, even despite these recent swings, most market pros say that purchasing bonds right now for a 401(k) plan, or any retirement account, isn’t as good an idea as consumers think it is, especially those looking for the best long-term return on their investment.
While these pros and market specialists realize that bonds are still considerably safer than stocks, and that consumers are wary of losing money and taking on higher risk, most still stick with bonds as being a better bet for a 401(k) and long-term returns.
Based on IFA.com data, including dividends, the long-term annual return for stocks have been approximately 9.6%. When you compare this to the yield on 10 year treasury bonds (U.S.:US10Y) which is stock at about 2% right now, the difference is obvious.
Ronnie Martin, the CEO of Voya, recently commented on “Closing Bell”, the CNBC market watch show, that individual investors not only need to make smart decisions in this market but also, once they make them, they need to have the confidence to see them through the long term.
When speaking about the preferred strategy that he gives his clients, he said that they should simply “stay consistent”, adding that it’s not a good idea to “trade in and out” when it comes to 401(k) investments.
The author of “Leading Indicators”, Zachary Karabell, also chimed in with his opinion, saying that recently he had noticed how many retail investors have been growing “equity scared and bond happy”, adding that this current phenomenon could ruin returns in the end.
Martin added to the conversation by saying that “when you consider 10,000 people turned age 65 every day in America, and will for the next 20 years, and really underlines the need to invest properly for retirement.”
When you consider that, over the long-term, stocks have always generated stronger returns than bonds, Martin and Karabell seem to have a very good point.
