Nygren: "Once-In-A-Generation Opportunity" for Investors

Bill Nygren, whose Oakmark fund is in the top 12% or better of its class over the past three, five, and ten years, according to Morningstar, says investors need to ignore high volatility if they want to succeed over the long haul.

“I’d say they should pretty much ignore it,” Nygren writes in his fourth-quarter market commentary. “The financial media have business reasons to make investors believe they need to follow every zig and zag of the market and of their portfolio, but I don’t believe one needs to. And for some investors, the more often they look at their portfolios, the more nervous they get, which can be counterproductive.”

Nygren says investors currently have a “once-in-a-generation opportunity to use asset allocation to add to their investment returns. … Stocks appear to us to be significantly undervalued relative to bonds. Despite that, many individual investors have been increasing their assets in bond funds and decreasing their assets in stock funds. Investors see how much more money they’ve made in bonds than in stocks over the past decade and regret not having been more heavily invested in bonds than they were. To make sure that doesn’t happen again, they sell their stocks and buy more bonds.”

That bond outperformance is unlikely to continue, however, Nygren says. So as 2012 begins, he says investors should make sure their portfolios are properly balanced, since strong recent bond performance has probably caused many investors to be too overweight in bonds. “We believe that most investors need to sell bonds and buy stocks in order to return their portfolios to their target levels,” he says. “This recommendation isn’t made just to reduce risk: We believe that from today’s price levels, equities will deliver much higher long-term returns than bonds will.”