From Stocks to Bonds: Time to Switch?

When's this beating going to end?

That's the question every investor has been asking since fall when the markets began their rapid descent as the nation's financial system began to unravel.

The truth is, no one knows. For a time, it seemed like the worst was behind us with relative stability as the New Year began. But then stock prices resumed their downward spiral in February and continued into March with Monday's dip below 7,000 for the Dow.

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There's nobody who can tell you when the economy will rebound or when stock prices will begin to recover. Anybody who says otherwise is either lying or delusional.

Nevertheless, investors are seeking answers to questions like the one posed below.

Q: I sold my business four years ago and retired at a young age (50). Since (the fourth quarter of 2008), I've seen my legacy reduced by 40 percent, with no signs of abatement. I've lost my stomach for stocks and feel sick about what took 22 years to build just disappearing before my very eyes. My financial advisors say now is not the time to bail, but I just can't stand to watch this anymore. If I lose no more net worth, I'll be okay. And growth doesn't concern me. I'd be happy to have the same net worth two years from now as I have today. Any suggestions? Currently I'm in a 60/40 model, stocks vs. bonds and cash.

-- J.G., Green Bay, Wisc.

A: J.G., my first suggestion is to take a close look at the bonds and cash on the conservative side of your portfolio. How much is there, and what kind of income does it produce?

The answers to those questions can help you decide whether to stick with stocks despite their tailspin or move entirely toward conservative investments. A close look at your portfolio and what's in it could help calm your nerves and decide whether you have the capacity to wait for a recovery in stock values.

We all look at the bottom line numbers for our portfolios and then calculate in our minds how much we've lost since early 2008. I've done it myself.

Time to Wait Out the Turmoil

But you need to look at more than the bottom line. Many investors, particularly those at or near retirement, should break down their portfolios into segments that represent what funds are needed over the short, mid and long terms. If there's enough to carry you through the short and mid term, then you may have the capacity to stick with stocks and wait for a recovery over the long term.

Imagine for a moment you rely only on the bonds and cash now in your portfolio to support your expenses. How long could you go before you had to touch your stock holdings?

If the bonds and cash would run out in six months, then clearly your portfolio needs to be readjusted with a more conservative bent. But if you could rely on strictly bonds and cash for five years or more, then chances are better that stock values will be higher than they are now.

Let's assume we're talking about a portfolio now worth $1 million, with $600,000 in stocks and $400,000 in cash and bonds. (If you retired at age 50, then I'm guessing your portfolio was at least that large.)

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