When markets get volatile, people start wondering whether they should sell their stocks or move more of their money into bonds. Before you make your next investment decision, it’s worth looking at how different ratios of stocks to bonds have performed over time—understanding, of course, that oft-repeated investing phrase: “past performance is no guarantee of future results.”
That said, the Financial Samurai has an excellent summary of how different investment breakdowns have historically performed. If you went all-in on bonds, for example, you can expect a portfolio that beats inflation:
A 0% weighting in stocks and a 100% weighting in bonds has provided an average annual return of 5.4% since 1926, beating inflation by roughly 3% a year.
However, if you put 80% of your investments in stocks and 20% in bonds (perhaps in a classic Boglehead three-fund portfolio) you can anticipate a higher annual return and a lot more ups and downs:
A 80% weighting in stocks and a 20% weighting in bonds has provided an average annual return of 9.5%, with the worst year -34.9% and the best year +45.4%.
Use the Financial Samurai’s breakdown to learn more about what you can expect from different types of portfolios. Then ask yourself how much volatility you’re able to handle in exchange for a potentially higher return (with greater risk of loss, assuming you aren’t able to stay in the market until it rebounds again).
Many financial advisers would suggest weighting your portfolio towards stocks when you’re younger, and gradually putting more of your money into bonds as you age. This allows you to take advantage of market growth during a period when there’s still plenty of time to recover from a market loss, and shift your investments towards less-volatile assets when there isn’t as much time to recoup after an unexpected market downturn.
If you sign up for a target-date or lifecycle fund, your portfolio will automatically shift towards a higher bond allocation as the fund approaches its target date—though it’s worth noting that some financial advisers aren’t fans of these types of funds, since they can include high expense ratios.
Ultimately, the best and most terrifying thing about investing is that you get to decide where to put your money—so it’s worth learning as much as possible about what might happen when you divide your investments among stocks and bonds, and how you want to manage and adjust that allocation over time.
