This is an excerpt from Young Research’s Global Investment Strategy, where we help investors compound wealth with investment strategies that span the global investment landscape. We cover the global stock and bond markets as well as currencies and commodities. Young Research’s Global Investment Strategy is designed for the investor who does not want his investment success bound by the opportunities of a single market.
How would you react if your life savings, the source of your livelihood in retirement, was cut in half? Would you have the nerve to ride out the storm in hopes of making your money back in future years? Or would you cut your losses? This isn’t a hypothetical question. These were actual returns. And based on the bubble valuations in the stock market today, these returns could be seen again before the decade is out.
If you are retired or soon to be retired, a 50% loss is unacceptable. Your portfolio would have to gain 100% just to get back to even. It took six years of zero percent interest rates, trillions in monetary bribery, and another bubble for the S&P 500 to recover its losses from the prior bear market. Investors nearing retirement or in retirement don’t have that kind of time, and they can’t count on monetary policy bailing them out again.
Including bonds in your portfolio can limit losses in down markets and provide you with the confidence and courage to ride out stock market volatility.
For over 40 years, the Vanguard Wellesley Income fund has included a bond component in its portfolio. The Wellesley fund invests about 40% of its assets in blue-chip stocks and 60% in bonds. How has Wellesley weathered the financial market storms of recent years?
During the three-year dot-com bust when the S&P 500 fell by half, the Wellesley fund was up—yes, up—21%. During the last bear market, the S&P 500 lost 56%, but Wellesley’s losses were limited to a more manageable 21%.
On paper, it may be true that an all-stock portfolio offers the highest long-term returns. But in practice, investors who pursue an all-stock portfolio are more susceptible to making emotionally charged investment decisions that sabotage portfolio returns. The stability that a bond component offers helps investors stay on course and achieve investment success.
Jeremy Jones, CFA is the editor of Young Research’s Global Investment Strategy, the Director of Research at Young Research & Publishing and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. is a registered investment advisor with offices in Newport, RI and Naples, FL that manages portfolios for individuals, families, and businesses throughout the United States. Richard C. Young & Co., Ltd. was ranked by Barron’s as one of the top independent advisors in the nation in 2012 & 2013.
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Jeremy Jones, CFA
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