Buzz
During volatile market periods, many investors question whether they should sell their stocks or allocate more funds to bonds. Before making any choices, it's useful to examine how various stock-to-bond ratios have historically fared, keeping in mind the well-known saying: “past performance is no guarantee of future results.”
That being said, the Financial Samurai offers an insightful breakdown of how various investment allocations have performed over time. For instance, if you opted for a fully bond-heavy portfolio, you could expect results like this:
A portfolio with 0% stocks and 100% bonds has delivered an average annual return of 5.4% since 1926, surpassing inflation by approximately 3% each year.
If you allocate 80% of your investments to stocks and 20% to bonds (such as in a traditional Boglehead three-fund portfolio), you can expect higher annual returns, but also greater volatility:
Check out the Financial Samurai’s breakdown to better understand what you can expect from various portfolio setups. Then, reflect on how much volatility you're willing to accept in exchange for potentially higher returns (while bearing the greater risk of loss if you're not able to stay invested through market corrections).
Many financial advisers recommend allocating more to stocks when you're young and gradually shifting to bonds as you age. This strategy lets you benefit from market growth when there's time to recover from losses, and switch to less volatile assets when there’s less time to bounce back after market downturns.
When you enroll in a target-date or lifecycle fund, your portfolio will automatically move toward a higher bond allocation as the fund's target date approaches. However, some financial advisers caution against these funds due to their potential for high expense ratios.
At the end of the day, the most exciting—and daunting—aspect of investing is that you have the power to choose where to allocate your money. That’s why it’s important to learn as much as you can about what could happen when you distribute your investments between stocks and bonds, and how you want to manage and adjust that allocation over time.
