Stocks and Bonds and My Portfolio

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Those of you who have read about my investing strategy know that at the present time I adhere to an allocation model of 50 percent large cap stocks and 50 percent long term treasuries.  I like things simple whenever possible.  You can read more about that here.

What Do the Experts Recommend?

In The Intelligent Investor, author Benjamin Graham posits that all should maintain a balance of stocks and bonds between 25 and 75 percent for each.  Never more and never less.  For example, if you held 25 percent in stocks you would hold 75 percent in bonds.  Or vice versa or anywhere in between.  Just so long as your allocation never exceeds 75 percent for either of these two asset classes.

For fun, I decided to back test three possible allocation models going back to 1978 (that is as far back as the calculator would allow) to see how each of the three models performed over that time.

The Competitors

Portfolio A: 25 percent large cap stocks & 75 percent long term treasuries

Portfolio B: 50 percent large cap stocks & 50 percent long term treasuries

Portfolio C: 75 percent large cap stocks & 25 percent long term treasuries

It is well known that stocks have provided a much higher return over time than bonds, however they come with much more short term risk.  So, how did each of these portfolios stack up in the long term?

 

Total Value Through July 2018 ($10,000 invested in 1978)

A:  $403,621

B:  $575,905

C:  $741,716

Portfolio C ran away from the group in terms of total return, which is somewhat to be expected.  It is fairly reasonable to expect that the large cap stocks had more than enough time to overcome any turbulent markets during that period to provide a great return.  So why would anyone want to maintain an allocation model like A or B?  Let’s look a little deeper into the numbers.

Worst Calendar Year Performance

A:  -4.98%

B:  -7.25%

C:  -22.14%

Here you can see that portfolio C, while providing the biggest long term gains, also provided the greatest short term losses.  Far and away on both counts.

How Do I Use These Numbers?

The question I asked myself when determining my investment strategy had to do with my investment timeline and psychology.  In terms of timeline, I needed to ask myself how soon I want to be able to turn my investments into income-producing assets to fund my expenses.

If it’s in the short term, stock market volatility could seriously give me the jitters.  If it’s in the long term, then you could say I have plenty of time to ride out any storms and take on some additional risk in the hope that the market will continue on its upward trajectory over time.  Of course, to do so also requires the ability psychologically to ride out those storms.  It’s important to always know where my head is at when determining how I should invest.

How Will I Use These Numbers in the Future?

You could say I’m potentially missing out on some major gains by not being more heavily invested in the stock market during an asset accumulation phase.  And you could be right.  One of the benefits of writing these blogs is getting to go through the exercise of evaluating my decisions to see if they stand up to scrutiny.  So far, I’m feeling good about where I’m at but I can also see the counterarguments.

This is not advice, just food for thought.

Figures obtained from https://www.portfoliovisualizer.com/

*As always, this article is not meant to give financial advice. Past results are not a guarantee of future returns. Everyone must do their own due diligence and determine the money managing and wealth building strategies that work best for them. Information provided here is meant to provoke thoughts, not provide recommendations. Investing in the stock market is risky and there are no guarantees.  Investors could lose their money.  This is not personal legal or investment advice and may not be appropriate for all readers. If personal advice is needed, readers should seek the services of a qualified legal, investment or tax professional.
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