Bonds play an important role in diversifying your portfolio. They typically have lower volatility, thereby dampening your downside risk. (Remember March of last year?) By acting as a ballast when the market drops, bonds allow us to hold on to our stocks as well as provide liquidity if we need to raise cash.
Many people express concern about investing in the stock market when the indices are at an all-time high. But a recent peak does not tell you whether the market is particularly expensive or cheap at any given moment. Rather, it's just part of the historic tendency for stocks to rise over time. As an investor, you are, after all, rooting for stocks to go up.
As long-term investors, we should be thinking about where the stock market will be in five to ten years (if not beyond). But human nature inevitably leads us to wonder what the fate of stocks will be in 2021. It's simple -- we don't know.
In June, CNBC.com discussed the implications of all of the money that fled into cash as a result of the pandemic-induced sell-off of stocks. They pointed out that some strategists believed that this flight to cash could soon rotate back into stocks, thereby causing the market to rise. This belief in the power of "cash on the sidelines" has an intuitive appeal. And why would you argue with "strategists?" But, their reasoning turns out to be false.
The overwhelming harm caused by the pandemic and the seemingly endless, hyper-partisan election season has led us to desire calm. So it's understandable that for Liz Ann Sonders, Chief Investment Strategist at Schwab, the present situation evokes The Rolling Stone's "Gimme Shelter." The following notes from the annual Schwab conference, which took place virtually last week, will hopefully provide some insight, if not calm.
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