Many investment advisors and financial planners urge their clients to blend various asset classes to achieve an “optimal” risk/return balance. Common stocks offer higher return potential than bonds but with a tradeoff: common stocks are riskier in the short term. A stock portfolio will feel the gyrations of the market more intensely than a bond portfolio. To mitigate risk, a popular blend of assets is 60% stocks and 40% bonds but does this blend make sense for the long-term investor?
A recent study by J.P Morgan comparing stock and bond returns over different holding periods echoed our previous comments in The Merit of Conventional Wisdom (initially released in 2006 and subsequently updated in August of 2012). The benefit of holding bonds is evident over a 1-year holding period. These benefits, however, disappear quickly as the time horizon rises. Once you pass the 10-year holding period, the case for bonds falls apart. Over any 20-year period from 1950-2013, stocks returned more than bonds with less risk.
Investing in stocks is not for everyone as risk tolerance levels differ from investor to investor. But many investors are looking at time horizons of 5, 10, 20 years or more and are looking to maximize growth. The long term return advantage of common stocks is why the Burney Company specializes in 100% equity portfolios. Read about our strategies here and contact us to find out if our services are right for you.