By JLP | April 13, 2007
I have always been in agreement with myself that 100% stocks is the way to go when investing for the long haul, I mean afterall, over the long run stocks perform the best. Historically that’s true and in my mind the case was closed. That was until yesterday when I put together Deciding the Trade-Off Between Volatility and Return…
After running the numbers comparing a 100% S&P 500 stock portfolio and a portfolio consisting of 90% S&P 500 stocks and 10% long-term government bonds, I will concede that the 90/10 portfolio has some merit. Take a look at the graphic that shows the annualized rates of return of each portfolio over different time periods to see what I mean:
Notice that over the last 5 and 10-year periods, the 90/10 portfolio actually outperformed the 100% stock portfolio. This should come as no surprise given what occured over the last 5 and 10 years. In fact, what I found interesting when doing the research was that since 1926, the 90/10 portfolio outperformed the 100% stock portfolio 31 times. Of those 31 times, 22 of them were during down years. Another interesting fact: during the down years, the 100% stock portfolio NEVER performed better than the 90/10 portfolio.
So the 10% bond exposure did its job of minimizing the downside during the down years. When you think about it, one could actually consider the “underperformance” of the 90/10 portfolio throughout all the years as a sort of “portfolio insurance expense.”