The importance of bonds goes beyond just their upside and involves stability, according to Joe Quinlan, head of market strategy with the chief investment office at Merrill and Bank of America Private Bank. Unlike stocks whose performance is random and erratic, fixed income’s steady and predictable returns give people a sense of control over their financial wealth. Many clients, he says, are willing to give up potential profits for the ability to be able to sleep at night.
“It is a trade-off, and that trade-off can be worth it,” Quinlan said. “A lot of investors want to have an idea that X percent of my portfolio is going to give me Y percent return. You can’t do that with equities.”
James Daniel at Advisory Firm LLC cited the dot-com crash as an example of the hazards from going all-in on stocks. “Ask any retiree that fully retired in 2000 after the tech bubble how an all-stock portfolio did while taking distributions for the next 10 years,” he said. “In theory, an all-stock portfolio works great. In reality, not so much.”
To Cederburg, telling investors to own fixed income because bad things happen in stocks is missing the big picture that equities tend to go up over time and more often than not, when shares do poorly, bonds suffer too. That’s what happened in 2022.
One way in which the new study differed from previous ones supporting the stock-bond mix is that while it let the computer run portfolios among a random sample of months and countries, it strung the months together in 10-year blocks in order to capture market cycles. Big crashes are often followed by big recoveries, for example.
Because the history of US markets is short when considered next to investment lives that may last 50 years or longer, the paper employed data encompassing 38 developed countries that went back to as far as 1890 in order to derive investment outcomes. By including non-US markets, it not only broadened the sample size but also acknowledged the potential that America’s superior performance in recent decades may not repeat in the long run, just as the UK peaked about a century ago and Japan’s heydays ended in the 1980s, according to Cederburg.
The benefit from the all-stocks approach continued after retirement, the study showed.
“Given the sheer magnitude of US retirement savings, we estimate that Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy,” the researchers wrote. “Bonds add virtually no value for the lifecycle investors we consider.”
This article was provided by Bloomberg News.