Contributed by: Nicholas Boguth
Unsurprisingly, I think investing is fun. This is one of the reasons I’ve chosen a career in investment management. With that being said, my career is only 6 years in. Is it possible that I only think investing is fun because the stock market has hit a new all‐time high every single year of my career? Do stocks ever fall? Why even own bonds that pay 2% coupons?
With the decade being over, and the S&P 500 rising almost 190% over the prior ten years, it seems like a good time to remind ourselves of a few key investing principles.
Stocks are risky. Their prices can fall.
Bonds are boring, but they have potential to help preserve your portfolio.
Asset allocation is the single most important investing decision you will make.
Asset allocation in its simplest form is the ratio of stocks to bonds in your portfolio. More stocks in your portfolio means more risk. More bonds in your portfolio means more potential to balance out the risk of stocks. As financial planners, one of the first decisions we’ll help you make is the decision of what asset allocation is most likely going to lead to your financial success.
Take a look at the drawdowns of a portfolio of mostly stocks (green line) compared to a portfolio of mostly bonds (blue line). Stocks may have roared through the 2010’s, but no one has a crystal ball to tell us what they will do in the 2020’s. This chart is a good reminder of what stocks CAN do. Be sure that your portfolio is set up to maximize your chance of success no matter what stocks do. If you are unsure about your current portfolio, we’re here to help.
Source: Morningstar Direct. Stock index: S&P 500 TR (monthly). Bond Index: IA SBBI US IT Govt Bond TR (monthly).
Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.
Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The IA SBBI US IT Government Bond Index is an index created by Ibbotson Associates designed to track the total return of intermediate maturity US Treasury debt securities. One cannot invest directly in an index. Past Performance does not guarantee future results.