Conservative Investing

“Conservative” investors typically prefer a healthy weighting of bonds in their portfolio because bond prices are much less volatile than stocks. But conservative investors must be starting to fidget as their “safe” bond investments continue to lose money in 2006 while virtually every other investor is celebrating gains. Andrew Mellon once said that “gentlemen prefer bonds.” But markets have not been genteel this year.

Speculators are doing well. The best returns are being generated in the international markets, where the central banks are friendly, currencies are stronger, and local stock markets aren’t trying to forecast the impact of a loud “Pop!” of a real estate bubble. Global business strength is also leading to impressive returns in the energy and basic materials sectors. Leading the list of laggards are “safe” sectors like health care, utility companies, and consumer staples stocks. At the bottom of the list, though, are the returns to bond investors. “Just don’t lose my money,” says the conservative investor, so the financial advisor buys him a bond. Oops.

Don’t get us wrong. We love bonds. At the right time, in certain environments, bonds are wonderful investments, even for growth investors. They offer a “certain” stream of income and a predictable cash flow, and they are usually a solid storehouse of value in markets where solid values are hard to find (or believe in). But for now the gentlemen are on the sidelines and hot blooded investors have moved from real estate to commodities. It is, after all, fun to make money – and the commodity and emerging markets guys are having lots of fun.

We think conservative investors ought to invest in bonds, when they’re doing well. Perhaps gentlemen prefer bonds, every day, of every year, 24/7. But as successful investors have seen – this is no time to be a gentleman!

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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