Bonds For The Long Run? Another Study Says Yes
One of the ongoing debates I have with myself is whether it’s worth including a bond component in a long-term portfolio. Andrew Hallam’s book Millionaire Teacher points to an interesting study showing that a 60% stock / 40% bond portfolio in the US, from 1973 to 2004, would lag an all-stock portfolio by only 0.7% per year. To compensate for that, the worst drop in 1 year is -9% rather than -20% for the all-stock portfolio.
Studies like this show that even a moderately large bond component may not be all that bad. The Canadian Couch Potato Portfolio from MoneySense shows that with 67% in stocks and 33% in bonds from 1975 to 2010, a balanced portfolio would beat the stock market on its own.
This seems to conflict with evidence from others such as Jeremy Siegel who finds stocks beating bonds every time over periods of 30 years or longer. If you’re going to put $1 in the market and not touch it for 30 years, does it make sense to put it in stocks alone and get a slightly higher return over time? Or can you do even better with a good balanced portfolio?
Despite all the evidence from studies, this is a trick question unless you can precisely plan the next 30 years of your life. You could have financial emergencies and unexpected expenses. I could need a couple of years of investment income while starting a new business. Someone might find out they can afford to retire 10 years earlier than expected or can’t work as long as they thought.
Money in the stock market only grows as long as you leave it in the stock market long enough to grow. It doesn’t matter if the stock market goes up 300% if this happens to be in the late 90s and you don’t sell before it comes back down. With the many uncertainties in markets and life there’s something to be said for paying a small price and gaining the ability to access your portfolio when you have a true need rather than having it locked away. And if this safety allows you to invest twice as much because you can take out a little when needed, you can do better than someone else who gets a slightly higher market return.
However even a balanced portfolio requires discipline and courage to manage well. To take advantage of the growth potential you need to re-balance when needed, which could still be hard for some people. Andrew Hallam shows the potential as he stuck to a disciplined plan with his balanced portfolio and became the Millionaire Teacher. If you follow that path consistently there is no reason for envy over other peoples’ investment returns.