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July 06, 2004 at 08:00 PM
| Index | Jun-04 | QTD | YTD | Description |
| S&P 500 Index* | 1.80% | 1.30% | 2.60% | Large-cap stocks |
| DJIA* | 2.42% | 0.75% | -0.18% | Large-cap stocks |
| Nasdaq Comp.* | 2.98% | 2.65% | 2.22% | Large-cap tech stocks |
| Russell 1000 Growth | 1.25% | 1.94% | 2.74% | Large-cap growth stocks |
| Russell 1000 Value | 2.36% | 0.88% | 3.94% | Large-cap value stocks |
| Russell 2000 Growth | 3.33% | 0.09% | 5.68% | Small-cap growth stocks |
| Russell 2000 Value | 5.08% | 0.85% | 7.83% | Small-cap value stocks |
| EAFE | 2.23% | 0.44% | 4.86% | Europe, Australasia & Far East Index |
| Lehman Aggregate | 0.57% | -2.44% | 0.15% | U.S. Government Bonds |
| Lehman High Yield | 1.43% | -0.96% | 1.36% | High Yield Corporate Bonds |
| Calyon Financial Barclay Index** | -2.51% | -7.28% | -3.92% | Managed Futures |
| 3-month Treasury Bill | 0.43% | |||
| All returns are estimates as of 06/30/2004. | ||||
| *Return numbers do not include dividends. | ||||
| ** Returns as of 06/29/2004. |
With the markets officially in a rising rate mode, a plethora of investment advisors are likely fielding the same question from investors: “Why should I own bonds?”
There’s little doubt that rates are poised to increase, but that does not necessarily mean that the total return of fixed-income securities will head straight down. If that were the case, I wouldn’t just sell bonds, I’d short-sell them.
The most compelling reason for including bonds in a portfolio is diversification. Consider the 1970s, a decade when interest rates increased from 5% to 14%. According to a recent Ibbotson study, an investor with a 30% allocation to bonds during this period captured 98% of the total return of stocks with only 73% of the price volatility.
If that statistic isn’t convincing enough, consider the possibility of another market shock, be it a stock market crash a la 1987, or another terrorist attack on U.S. soil. In the past, bonds acted as a shock absorber during such tumultuous events, cushioning the bruising performance of equities.
