A frequent question facing investment managers is how to preserve the retirement nest egg.   Customers today are understandably concerned. The stock market is in its seventh year of growth. Many people at or near retirement do not have the stomach for a serious bear market. U S Treasury securities may be safe, but the yields on bonds, CDs and money market accounts are so low that investors are losing ground to rising prices. Some are probably thinking that they would do as well to put their money under a mattress.

The outlook is encouraging. Investment markets may seem hopelessly fickle at times, but they do respond to the outlook for economic fundamentals. The U S Department of Commerce and the Federal Reserve provide reams of statistics on a regular basis. Most individuals will never see or care about the details, but the data paint a reasonably optimistic picture. Despite what the prophets of gloom and doom would have you think, there is ample support for continued growth in stock prices. We are not on the verge of deflation; the credit situation for individuals and corporations is not at risk, and consumer sentiment is improving.

This week’s highlight may be Fed Chair Janet Yellen’s speech at the Jackson Hole conference on the economic outlook. Her 16-page speech undoubtedly was full of details that most of us will be glad to forego, but several points are worth repeating. She thinks the employment data show continued slack in our labor markets. The positive side is that the labor market has added over 200,000 jobs each month for most of this year, and unemployment has fallen to 6.1%. Inflation is not an immediate concern, and the Fed is sticking to its earlier position that it will not raise the key Fed funds rate until mid-2015.

Can we afford the risk? Many individual investors will gladly admit that they are nervous about stock market levels. They simply do not want to lose what they have earned. Their concerns, however, may be overdone. Corporate profits, the basis for stock valuation, continue to rise. Price/earnings ratios, at the upper band of their normal range, are certainly not exorbitant. If inflation remains in check as is likely, the market should continue rising with its normal volatility.

By reducing stock positions out of caution, investors have missed the 22% growth in the market over the last 12 months. That’s history. What we all face as investors is what to do today. We know the adage about the risk of ignoring the lessons of history, but the fundamentals support higher stock prices. Their risk may be the loss from not owning stocks.

How much is too much? One of asset managers’ biggest decisions is the appropriate asset allocation, the percentage mix of stocks and bonds. The number is as varied as there are investors because each person’s situation can be a function of age, health and risk tolerance (price volatility) to name only a few. Most of us use a mix of 60% stocks to 40% bonds as a starting point. Older investors generally prefer a greater bond allocation because bond income is generally assured, and there is less price volatility. Persons with larger portfolios may hold more stocks because they are less likely to see their life style affected by a market decline.

An ultra-cautious position would be all bonds. The downside is that cost of living increases will generally require a 30% allocation to stocks to keep the portfolio’s purchasing power from eroding.

Bonds have risks also. Often the assets are used for living expenses. If bonds are sold before maturity after interest rates have risen, a drop in price is inevitable. Further, the longer the time until the bond’s maturity, the greater the price drop from an early sale.

As an example, consider what happens if the 10-year U S Treasury note is sold after interest rates rise. The note currently offers a yield to maturity of 2.40% while money fund rates remain near zero. The government guarantees full repayment at maturity. But if rates rise as the Fed predicts, the market value of that bond will fall. A mere 1% rate increase could cause approximately an 8% drop in the bond’s value. That will be the level that a new buyer would demand of a bond yielding only 2.40%. The initial investor would have sacrificed over three years of earnings from a forced sale before maturity. That is a big price to pay for the slightly higher yield.

Don’t give up on bonds. There is no easy answer to the yield dilemma. To get the higher yield in today’s market the investor must accept lower quality, longer dates to maturity or some combination of both. There is relative safety, however, in intermediate maturity bonds, and corporate debt offers yield advantages. Mutual funds with quality holdings and average maturities of three to five years are available. Their yields are near the cost of living increases, and they are far better than money market rates.

The moral of this story is that it pays to be attentive to the opportunities as well as the risks. There is a place for both stocks and bonds in your portfolio. Your investment advisor can show you the way.