All-bond allocation unwise despite equity jitters, says Ibbotson

Despite the superior performance of fixed-income assets recently, an all-bond asset allocation is unlikely to deliver investors the returns they need in the future, according to analysis released by Ibbotson Associates, the research division of Morningstar Inc. of Chicago. “This is the worst time to put all of your money into bonds, given the low-yield environment,” said Peng Chen, president of Ibbotson. In an analysis of the 40 years through March 31, the firm found that the Standard & Poor’s 500 stock index had an average annual return of 8.70%, compared with returns of 8.03% and 8.79%, respectively, for the SBBI Intermediate Term Government Bond Index and the SBBI Long-Term Government Bond Index. The performance was influenced by high interest rates in the 1970s, followed by almost 30 years of declining interest rates, said Mr. Chen, who predicted that this scenario — which also created capital gains — is not likely to be repeated in the future. Going forward, bond returns probably will average 3% to 4% annually, he said. A diversified allocation to stocks and bonds remains the best strategy, the researchers found. In fact, over the 40-year period, a portfolio with an allocation of 60% stocks and 40% bonds had an average return of 9.11%.