Frequency of Losses—Asset Class Mixture

Sunday’s post looked at one aspect of risk—a very narrow aspect, at that—and compared the riskiness of stocks and bonds. But of course nobody ought to have all of their retirement investments solely in one asset class or another. How risky is investing if your assets are in a mixture of stocks and bonds?

I’m glad you asked. The green line in the graph below builds on the information shown in Sunday’s post. It answers the musical question, “In the past, how frequently would you have experienced a real (i.e., inflation-adjusted) loss if your assets were invested 50% in stocks and 50% in bonds?”

As in Sunday’s post, the answer depends on how frequently you choose to measure your investment progress. Historically, a 50%-50% mixture of stocks and bonds has been slightly less risky—at least as measured by this particular and narrow dimension of risk—than either stocks or bonds standing alone. If you had looked at your investments every calendar year, your mixture would have shown a real loss during 31% of the 83 years studied. That is slightly better than 33% for 100% stocks and 39% for 100% bonds.

And, as with stocks alone or bonds alone, the green line shows a generally decreasing frequency of real losses as you increase the length of time between measurements. With a 50%-50% mixture, in the past 83 years there has been no period of 18 years or longer during which such a mixture exhibited a real loss.

Important: Note that the green line is mostly lower than either the blue line (100% stocks) or the red line (100% bonds). Which means that a nice mixture of stocks and bonds has proven less risky than putting all your eggs in one basket. At least as measured by this particular (and limited) facet of risk.

But, like a Batman villain, risk has many faces. More to come.