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Stocks Vs. Bonds: How to Position Your Portfolio for the Next 10 Years


While stocks will likely be the winners of the next decade, they're most certainly going to experience some pain along the way.

What do you think would happen if you asked someone on the Street whether stocks or bonds would outperform over the next 10 years?

Most likely 95%+ of informed investors would say stocks, of course! The bull market in bonds has been on for the last 30 years, and with the bloated Fed balance sheet there is nowhere for interest rates to go but up. However, many would ultimately concede that the road to stock supremacy will likely be fraught with many violent ups and downs that will test the resolve of even the steeliest investor.

Everyone remembers the "lost decade" of the 2000s, where stocks plunged in the early part of the decade only to recover and then ultimately get the rug pulled out from under them again. If you clocked the SPDR S&P 500 ETF (NYSEARCA:SPY) at the beginning of 2000 and then again at the start of 2012, you would have registered zero positive net returns over that 12-year time frame.

That assumption is based on a buy-and-hold strategy that I feel is fraught with peril for both stocks and bonds over the next 10 years as well. There will always be money to be made in both asset classes assuming that you properly navigate the pitfalls along the way. For me that includes analyzing the macro economic data along with sticking to a trend-following strategy that is designed to avoid big losses.

The recent rise in the 10-Year Treasury Note Yield Index to its current reading of 2.56% has pushed the yield on intermediate Treasuries back above the S&P 500 (INDEXSP:.INX) dividend yield of 1.91%. This divergence has actually been healthy for the bond market to work off some of its overbought momentum. For income investors, the yields on dividend-paying equities are getting lower while the yields on bonds have reached attractive levels that we haven't seen in years.

In my opinion, for new money being put to work right now, bonds present a better value when compared to buying stocks on their highs. Particularly when you factor in the pullback that ETFs such as the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) and PIMCO Total Return ETF (NYSEARCA:BOND) have experienced this year.

While I ultimately believe that stocks will be the winners of the next decade, they are most certainly going to experience some additional pain along the way. That is why I have been recommending that you pair back your stock exposure in favor of waiting for better future buying opportunities in dividend-paying equities. That way you have some dry powder on the sidelines to make opportunistic purchases when stock valuations reach more attractive levels.

One of the investing fallacies I often see is that people feel like they have to be doing something with their money all the time. However, oftentimes the best thing to do is to wait for an opportunity in the safety of cash rather than chasing a trend that is overbought. You don't want to be the last person to jump into the fray only to watch your hard-earned capital evaporate in a swift correction. Remember to be patient, build your watch list, and act decisively when a favorable opportunity presents itself.

Read more from David Fabian, Managing Partner at Fabian Capital Management:

5 Funds to Buy for Rising Interest Rates

Ben Bernanke: The Most Powerful Man in the World

Why This Is Not a Buy and Hold Market

Twitter: @fabiancapital
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