By James Motte
In a previous post, I provided support of how risky the “Stock Market” is with an all-equity portfolio (S&P 500 as the “Market”). Below is a recap of that information. The S&P 500 is made up of the 500 largest US Company stocks and is widely accepted as a proxy for the US Stock Market.
What happens if bonds are added to the equation? Below is some information for a portfolio invested 50% in the S&P 500 and 50% in Long-Term Government Bonds (Long-Term Government Bonds are high quality U.S. Government holdings with maturities of 10 years or greater). The chart below shows how these bonds have historically helped reduce the volatility of an all-equity portfolio.
The charts above show the effects that time has on a portfolio. As you can see the Market can have significant volatility in one year time frames (even with half of your portfolio in bonds). But as holding periods increase, the likelihood of a positive return increases as well. A portfolio invested only in the S&P 500 has never had a 20 year time frame when it has lost money and 95% of the 10 year holding periods have had positive returns. A portfolio made up of 50% S&P and 50% Long-Term Government Bonds has never had a 10 year time frame when it has lost money and 94% of the 5 year holding periods have had positive returns as well. The mix between stocks and bonds (asset allocation) is one of the most important decisions and investor has to make. I believe knowing these statistics helps investors make better decisions regarding their asset allocation and to stay the course when times get tough.