Your investment portfolio’s asset allocation—its mix of stocks, bonds, cash and other securities—is a crucial determinant of long-term investing success. In fact, research from Fisher Investments shows that how you allocate your portfolio determines about 70% of your returns over time.
In our experience, many widely held beliefs, or “rules of thumb,” regarding asset allocation can lead investors astray. For example, the idea that stocks are generally “riskier” than bonds misses some important context. While a bond-heavy retirement portfolio may exhibit less short-term volatility, it could also mean a greater risk you run out of money if your goals require higher levels of growth.
Ultimately, we believe your asset allocation should target risk and return characteristics that match your financial goals and objectives.
Are Bonds "Safer" Than Stocks?
Some investors nearing retirement assume they should allocate a larger segment of their portfolio to bonds. They adopt this belief for several reasons, including:
- Bonds can provide a steady stream of income, something retirees often need to offset their living costs.
- Bonds can be less volatile, which might help hedge against market risk.
While these points contain some truth, we caution against making an asset allocation decision based on a “one-size-fits-all” approach.
Here are some additional points to consider:
-
Low Returns
-
Low Volatility
Low returns may shorten the length of time your investment portfolio can provide for you during your investment time horizon.
These days, retirement can last 30 years or more. Not having enough money to cover your retirement can be devastating.
In recent decades, the average investor’s time horizon has increased, which requires more money (and likely more growth) to meet long-term objectives.
You could run out of money for several reasons:
- Rising living costs
- Inflation
- Higher medical costs
- Supporting other family members during your retirement
Additional Risks to Consider
Volatility risk shouldn’t be the only consideration when choosing stocks or bonds. There are other often overlooked risks that bonds and stocks can present.
Bond Risks
Credit Risk
The bond issuer may be unable to pay interest or repay principal.
Liquidity Risk
Some bonds cannot easily be bought or sold. This can tie up funds or force investors to accept less favorable pricing.
Reinvestment Risk
Interest payments and cash from maturing bonds may have to be reinvested at lower rates if interest rates are declining. This means you may end up spending more for smaller returns.
Interest Rate Risks
A rise or fall in interest rates may work against your bond allocations. Bond prices and interest rates have an inverse relationship, which means bond prices fall when interest rates or inflation rise.
Stock Risks
Volatility Risk
Higher short-term price volatility is possible with stocks.
Principal Risk
Investors can potentially lose principal if companies do poorly or go bankrupt.
Dividend Risk
Companies can possibly reduce or revoke dividends.
We Are Available to Help Address Your Asset Allocation Questions
There is no one correct asset allocation strategy. Every investor has unique financial circumstances, goals and risk tolerance—but you don’t have to go it alone.
At Fisher Investments, we are committed to understanding your financial needs. We can help you strategically allocate your assets between stocks, bonds and cash to diversify your investment portfolio and address your longer-term financial goals.
The contents of this document should not be construed as tax advice. Please contact your tax professional. Investments in securities involve the risk of loss. Past performance is no guarantee of future returns.
1Source: Global Financial Data, as of 12/31/2023. 5- and 30-year rolling returns from 12/31/1925 to 12/31/2023. Equity returns based on the S&P 500 Total Return Index. Fixed Income returns based on Global Financial Data’s USA 10-Year Government Bond Index.