Why Stocks And Bonds Are The Core Of Any Portfolio

“Stocks are overvalued and risky. Bonds yield nothing and expose you to interest rate risk. So you need to invest in alternative assets.” – Pretty Much Everyone

I am a big advocate of a core and satellite approach to asset allocation. For instance, in my book I talked about the Total Portfolio approach. That is, everyone should own a diverse group of assets and consider how their Total Portfolio relates to what we typically think of as our “investment portfolio”. This might include real estate, cars, collectibles, art, Bitcoin, stocks, bonds, etc. Some of these items will lose value over time. Others will increase in value. You diversify specifically because you never know the future. But at the core of this portfolio are stocks and bonds. Why? Because everyone needs a high degree of certainty about the future of certain assets in their Total Portfolio. And stocks and bonds are the primary assets in the spectrum of assets that provide us with somewhat predictable cash flow streams over very specific time horizons.

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I’ve written a good deal about how all of asset allocation is a “temporal conundrum”. In other words, we all have specific time horizons on certain liabilities – your rent, your mortgage, your credit card bill, etc. And the key to good financial planning is matching those liabilities with certain assets that are very likely to provide liquidity for those future expected expenses. Your biggest asset is your labor and the predictable income stream that it generates for you over time. But you also need a portfolio of other assets that are likely to provide you with  supplemental cash flow streams over time. Especially if you ever want to retire.

This is why stocks and bonds play such an important role in your portfolio. Most of us won’t generate predictable cash flows from owning real estate, cars, art, Bitcoin and other non-cash flow generating assets.¹ So stocks and bonds play a crucial role in asset allocation specifically because they provide those predictable cash flow streams. While markets may not be perfectly efficient it’s actually quite rational that these two markets make up the vast majority of the global financial markets – investors like to own them because they generate somewhat predictable expected returns over specific time horizons.

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Disclaimer: The content in this article is provided as general information only and should not be taken as investment advice. Article content shall not be construed as a recommendation ...

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