Balanced Portfolios Offer Growth & Stability

August 19, 2014

We’ve been managing fund portfolios for clients since 1969, and the clients who’ve been with us the longest tend to have one thing in common: their portfolios are invested in both stock funds and bond funds.

It’s not only our clients who favor balanced portfolios. The classic allocation of 60% stocks and 40% bonds is also commonly used by retirement plans and trusts. One reason why this allocation is so popular is that it’s been effective through multiple market cycles.

We examined the performance of stocks, bonds, and a 60/40 allocation over every rolling 10-year time period from 1925-2013. Looking at rolling periods, each with a different monthly starting date, offers a comprehensive picture of all the possible outcomes, regardless of when investors happened to start investing.  The chart, below, shows the maximum, minimum and mean returns of stocks, bonds and a 60/40 mix.

10-Year Rolling Returns: 1925-2013
Stocks vs. Bonds vs. Balanced 60%/40%

BalancedPortfolio

Stocks had the highest average returns, as expected. But few investors can stick with a stock-only portfolio long enough to experience these higher returns.

As Mark Hulbert wrote in his June 6, 2014 Wall Street Journal article How Much Stock is Too Much:

“many of the erstwhile all-stock investors who at some point bail out do so at the worst possible times—near the bottom of a bear market—and don’t get back in until a bull-market recovery is well under way. As a result of this counterproductive behavior….it is extremely rare for an investor’s real-world return to be anywhere close to an all-stock index fund’s theoretical potential.”

The 60/40 portfolio had lower average returns than stocks, but this portfolio had higher average gains than bonds, and perhaps more importantly, the 60/40 allocation never lost money for any of the rolling 10-year periods. And because it held up better during bear markets than an all-stock portfolio, most investors are able to stick with it to reap the long-term benefits.

The balanced portfolio had an average annual return of 9.7%, somewhat in between those the average returns for stocks (11.7%) and for bonds (6.1%).  The balanced portfolio’s worst 10-year performance was a small gain of 0.4%. Stocks, on the other hand, lost 5.0% a year during its worst 10-year period, and bonds gained 1.0% during its worst period.

If you need help allocating your portfolio to stock and bond funds, call in and ask to speak with a portfolio manager. We’re here to help.

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