Over the long haul, common stocks have proven to be one of the best hedges against inflation, as pointed out by Warren Buffett in this CNBC article.
And even though stocks are likely to outperform bonds in the decades ahead, does it make sense to allocate some of your portfolio to bonds, CDs, or cash investments?
If so, why, and how much?
Let’s start at the very beginning.
When determining your allocation between stocks and bonds, it is essential to strike a balance between the financial and emotional aspects of this decision.
The first step to help you weigh the financial versus emotional tradeoff is to clearly define your financial goals and time horizon. Identify what you are investing for, whether it is retirement, a down payment on a home, education expenses or other financial objectives.
From a financial and common-sense standpoint, it makes sense to keep dollars that will be needed for expenses over the next 5 to 7 years out of the stock market. This is especially critical for investors who are nearing retirement, and face the potential of a bear market, often referred to as “sequence of returns risk,” explained here. To put it bluntly, you never want to put yourself in a position of selling stocks in a bear market to pay the electric bill.
From an emotional standpoint, you might feel less stressed with twice that amount in fixed investments like bonds and CDs, knowing that this allocation will help cushion a portfolio’s decline even more in the next bear market. This peace of mind might just help you stay disciplined and avoid making impulsive decisions during market fluctuations.
Creating an allocation between stocks and bonds that reflects your goals, your finances, and your emotions is a worthy undertaking, and begins with first creating your financial plan. We’ll take a deeper dive into financial plans next week – stay tuned!
In a 30-minute call, we will discuss smart strategies to accumulate and withdraw wealth, rebalancing methods, and aspects of your financial plan that include tax planning, insurance needs, and estate and legacy planning.
If you have $1 million or more of investible assets and are in or close to retirement, book a strategy call with me.