Hello,
So I always knew that the the first 10% of bonds added to a stock portfolio didn't reduce the return much compared to adding another 10% and so on. The reason why it works that way is that every marginal unit of risk added to a portfolio is less rewarded. So if you have 100% bonds portfolio, the first 10% of stocks you add increases your return much more than the last 10%.
I stumbled upon this vanguard page: https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations?lang=en, and it actually shows you exactly what I just explained. Here's a chart showing the return increase of each 20% of stocks added to a bond portfolio:
| Allocation | Increase in return from the change in asset allocation |
|---|---|
| 100% bonds | |
| 80% bonds | 1.30% |
| 60% bonds | 1.10% |
| 40% bonds | 1% |
| 20% bonds | 0.80% |
| 0% bonds | 0.70% |
*data from 1926 to 2017
Basically, this proves that even though people under 30 often say that there's no reason to hold bonds. Well, is there a reason to not hold bonds? Unfortunately, the vanguard article didn't show how the bonds decreased the portfolio's volatility, but I went on portfoliovisualizer and it shows that from 1987 to 2018. Adding a 10% bond allocation decreased the portfolio's return by 0.3% while decreasing its volatility by more than 2%! If you add a 20% international stocks allocation, it actually increases the portfolio's return. And if you had Long term treasuries instead of the total us bond market, your return would be less than 0.1% lower with a 2% reduction in volatility.
Considering this, what are the advantages of being 100% stocks? US stocks is the asset class that had the best performance in the past century, but if total return is really all that matters and there, why not be 100% in REITs? I believe that even though stocks are the best way to get a good return, the small reduction in return should make bear markets less painful and increase a portfolio's efficiency (Sharpe ratio). You can also choose bonds that fit your risk profile (like long term treasuries, emerging market bonds or corporate bonds)
I am 21 years old and my portfolio is 90% equity (momentum, value, REITs, emerging markets, etc.), and 10% bonds (Emerging markets bonds and LT treasuries).
A lot of people a lot smarter than me are 100% stocks, so I would like to know about the reasons why I might be wrong and being 100% stocks is better!
Submitted February 18, 2019 at 09:09PM by etienner http://bit.ly/2IAdZML
