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Risk Comparison Stocks vs. Bonds

History tells us great stories if we are willing to listen. "Those who cannot learn from history are bound to repeat it." Winston Churchill


Machiavelli said "Whoever wishes to see the future must consult the past; for human events ever resemble those preceding times. This arises from the fact that they are produced by men who ever have been and ever shall be, animated by the same passions, and thus they necessarily have the same results."


Bonds Return vs. Risk


The historical record over the last 50 years (using monthly data) shows that over 5-year intervals total returns in the 10-year treasury note only "lost money" 1% of the time. This 5-decade stretch includes every kind of market and economic condition from inflation to disinflation, recessions, and expansions. In 5-year periods bonds make money 99% of the time.




The best 5-year window in bonds produced a 6.5 % annual return and the worst was -.4%. The mean was 4.2% per year. Over 20-year periods we didn't find one period when the 10-year t-note lost money and the average was 7.6% annually.


This is a compelling case for bonds as ballast in the portfolio. Just a 1% chance of losing money in a 5-year window is compelling in a bad economy and a bear market.


Stock Return vs. Risk


The Standard and Poor's 500 historically has a loss for investors 20% of the time. The average return of 12% also factors with a high of up to 60% and a worst performance of -43%. The volatility is intense and dangerous for someone who is retired or getting ready to retire and take income distributions from the portfolio.





The probability of losing money in stocks over 5-year intervals is 8%. Eight times higher than the bonds. The range is very large with the best at 30% per annum vs. -6.6% per year at the worst for 5 years. Losing an average of -6.6% for a retiree for 5 consecutive years while taking out money is a disaster for many. Looking at 10-year periods stocks are down 5% of the time versus bonds at .2% being down.


Both stocks and bonds are important in the portfolio regardless of whether an investor is taking an income from the assets. Being too heavily weighted in risk assets and taking withdrawals can be treacherous. Many retirees found this out the hard way during the financial crisis and paid dearly with 35% losses on their 60/40 portfolio.


Very wealthy investors can afford to take these kinds of losses and continue with their lifestyle. Yes, they will cut back where they feel necessary but will be fine. Losing one-third of $300 million to $200 million hurts but doesn't exactly put you in the poor house. It is quite different to go from $6 million to $4 million or $900,000 to $600,000. It is not whether you can live with the losses, it is whether the losses will change the way you live!


Risk mitigation is extremely important taking income from their portfolio. It is a completely different game than just investing for growth. The sequence of returns matters greatly and large early losses in retirement can be devastating and must be avoided to maintain lifestyles for most investors. High-risk markets and recessionary economies do need to be addressed and adjustments should be made to protect one's lifetime income streams and portfolio value.







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