The right mix of investments
By Bob Landaas
I spent an hour recently with a client who was wondering about the right stock/bond mix. It’s an important question.
Recently, the Wall Street Journal reported on research showing that since 1926, if you were invested 100% in stocks, you would have made 10% a year. If you had 60% in stocks, 40% in bonds, you would have made 9%.
So you gave up 40% of the risk in the stock market and captured 90% of the upside. Let me repeat: With 60% in stocks and 40% in bonds, you gave up a little bit of the upside and got a whole lot more downside protection.
So what’s the right stock/bond mix?
I don’t know that there’s an exact percentage for everybody. Part of it depends on how much money you need every month to take care of yourself. Part of it depends on how much you need as a percentage of your overall portfolio. Part of it depends on your appetite for risk.
What is most important – no matter what your stock/bond mix – is to make sure you don’t get to the point where you freak out and panic when prices go down.
Behavioral psychologists will tell you that selling pressures intensify when prices go down. If they go down a little bit, you feel crabby. If they go down more, you start to panic. If they go down a lot, the average person just caves and throws in the towel.
We’re hard-wired to run from danger. Way back in the saber-toothed tiger days, if you saw one, you ran. It’s the fight-or-flight syndrome. Most people are wired to get out when the markets go down.
So whatever your stock-bond mix, make sure you get it to the point that when the market goes down, you don’t panic and get out.
Investors also have that same problem – in reverse – when the markets are at very high levels. People get really piggy, and they want to invest more, and they tend to skew their portfolios more to stocks than to bonds – which is equally wrong.
So many people inflict damage to themselves and their portfolios by buying when prices go high and selling when prices go low. As financial professionals, we are disciplined to react the other way around. When prices go down, we say, ‘Yea! Yippee! Stuff’s on sale. Let’s go shopping – as opposed to selling.’
We have fancy technical tools such as the Efficient Frontier to help you try to find the right stock/bond mix for you. But consider the importance of having a mix. Think of the sweep of history from 1926 to the end of 2013: 100% of your portfolio in stocks averaged 10% per year with dividends reinvested; 60% in stock/40% in bonds did 9%. That speaks volumes.
Bob Landaas is president of Landaas & Company.
(initially posted June 20, 2014)
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