Merrill and the Bull

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

The typically bullish Merrill Lynch surprised Wall Street last week by recommending a shift in asset allocation from equities to bonds.

Merrill suggested that investors reduce their stock allocation to 45% from 50% of their total assets, and to increase their bond holdings to 35% from 30%, with the remaining 20% in cash.

According to Bloomberg News, Richard Bernstein, Merrill’s Chief U.S. Strategist, told investors, “The equity market still appears highly speculative to us. Such speculation is typically indicative of the end of a market cycle, and not of the beginning of a major bull market.”

In fact, Bloomberg reports that Merrill has buried the bull, maintaining a 12-month target for the S&P 500 index of 860.00. This index closed last week at 934.53.

What’s behind it

But we think there may be more to Merrill’s announcement than meets the eye.

We believe that the “powers that be” at Merrill Lynch have the same concerns that we do. Namely, that a large percentage of investors are still substantially overweighted in stocks, some with equity holdings representing more than 80% of their total assets.

We think Merrill wants to make clear to the public that they do not recommend that clients “stay the course” and wait for the market to return to its old highs – which is contrary to what some individual brokers might be telling their clients.

Merrill’s concern about how stocks will perform hides a more important and fundamental issue concerning asset allocation.

Proper asset allocation is fundamental to intelligent investing and shouldn’t be effected by the short-term performance of any market. As we have said, a properly constructed portfolio should include both stocks and bonds – stocks for growth and bonds to provide balance and cash flow.

In our view, the intense coverage devoted to stocks has obscured the more mundane but useful and timely principles of balance and diversification. We’re confused by Wall Street firms’ advice to investors to change their asset allocation. It seems to belie their professed belief in taking a long-term approach to investing.

Will the next uptick in stocks cause them to adjust their asset recommendations yet again? We wouldn’t be surprised.

Stocks and bonds. Balance and diversification. Sound strategy for the long term.

James A. Klotz

President

James A. Klotz is the President of FMSbonds, Inc.
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Dec 11, 2002

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