Why Stocks And Bonds Are The Core Of Any Portfolio

Better yet, a simple portfolio of 50% stocks and 50% bonds generated 7.5% annualized returns from 1940-1980. Not bad!

Of course, if you took that 10 year bond and you treated it like a 10 month bond then you ran into problems at times. But this is all part of the temporal conundrum. If you have a 10 month time horizon on your assets then you shouldn’t be buying 10 year instruments in the first place. You just create a temporal imbalance in your portfolio which leads you to the risk of behavioral biases. If, on the other hand, you have a 10 year time horizon and you know the duration of certain liabilities then you can begin to predictably match the appropriate amounts of cash, short-term bonds, medium term bonds, long-term bonds and stocks to those specifics liabilities. Sure, you’ll generate lower returns than if you hit the gas on stocks or other high risk assets, but you trade certainty for returns. That’s just how this game works. And that’s why everyone ends up owning big chunks of cash at pretty much all times.

Look, I am a big fan of managing the risk in a portfolio. We are all active investors and we all need to navigate the unpredictable future by making active decisions about our portfolios. But it’s also important to keep things in perspective and maintain a prudent approach to portfolio management that optimizes that risk management for the temporal risks you’ll inevitably encounter across your life. And this is why stocks and bonds have always (and will always) play such an important role as the core of any diversified portfolio – because most of the other assets we own simply cannot provide us with the predictable cash flow streams across specific periods of time.

¹ – This is obviously not true for everyone. Apologies for generalizing. Also, this is a very different situation when you turn one of these assets into your labor and investment. Eg, if you run a Property Management Company then real estate becomes your core cash flow generating asset. 

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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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