This is part 3 in my series discussing “Stocks for the Long Run” by Jeremy Siegel. The book uses historical data going back to 1802 to make a case for owning stocks, despite their risks.
Part 3 – There is a place for bonds in investment portfolios
The strong case for stocks over bonds that Siegel makes, he does address the purpose of bonds in the average retiree’s portfolio. While stocks have historically produced superior returns over longer time horizons – try telling a retiree to wait 20 years for things to correct.
The reality is that a portion of investments will likely be used to provide retirement income in the next 1, 5, or 10 years. This should be taken into consideration because there have been numerous short-term periods where stock returns have substantially underperformed bonds or cash.
Over shorter periods of time, the main objective of the investor is often predictability. Siegel analyzes this by calculating the standard deviation – which essentially estimates how predictable to returns could be. Using data from 1802-2012, he uses two asset classes, stocks and bonds. If you were trying to keep your deviation down as much as possible using just these two assets, he calculates that the following would be the best way to achieve it.
For money needed in 1 year: An allocation of 87% bonds and 13% stock
For money needed in 5 years: An allocation of 75% bonds, 25% stock
For money needed in 10 years: An allocation 61% bonds, 39% stock
Disclaimer: Mention of any author, their publications and materials does not constitute endorsement or recommendation. We do not assume responsibility for the validity of cited references or the consequences of their use. All references to bonds refers to US long-term government bonds and all references to stocks refers to dividends plus capital gains on a broad based capitalization-weighted index of U.S stocks. Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized investment, tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing. You cannot invest directly in an index.
Siegel, Jeremy J. Stocks for the Long Run: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies. McGraw-Hill Education, 2014.