Previously, we discussed how individuals can successfully build wealth over time by being like the Tortoise and embracing time and consistency. Then last week, three charming little pigs helped us explore the perils of the fast-to-build and quick-to-come-down portfolio, as well as the too-conservatively built portfolio that shrinks over time. So, what’s an investor to do? This week, we look to Goldilocks to help us uncover how to build the “just right” portfolio.
We have all heard how little Goldilocks, lost in the woods as many a fairytale character is wont to do, stumbles upon a cozy cabin. Hungry, she finds three bowls of porridge on the table and without much hesitation, she begins to taste each one. She quickly discovers that the three bowls may be filled with the same ingredients, but they don’t all suit her, much as investors need to identify the right mix of assets that is just right for him or her.
Most individuals have some mixture of stocks and bonds in their portfolio, but the temperature can vary widely depending on the relative size. Stocks, with their hot return potential over time, act as the engine of growth. Though as Goldilocks soon discovered, a too-hot portfolio can also be anxiety inducing and not appropriate for shorter-term cash needs. In fact, looking back to 1990, a portfolio that held 80% in stocks and just 20% in bonds fell at one point close to 50%.
Enter bonds. Bonds tend to fall much less than stocks (2022 being an exception), cushioning a portfolio in down markets and providing an investor with consistent income. No child will scorch her tongue on a portfolio heavily weighted toward bonds, but that cooler temperature means she may not grow wealth significantly over time. A different portfolio, this time with just 20% in stocks and 80% in bonds, grew one third less than the hot portfolio above.
Hypothetical Returns of an Investment in the S&P 500 Index & Bloomberg U.S. Aggregate Index
1/1/1990 to 3/31/2023
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: views are from a U.S. dollar perspective. The rebalanced portfolio is rebalanced on a quarterly basis. Source: Kestra Investment Management with data from Morningstar. Index proxies: S&P 500 Index and Bloomberg U.S. Aggregate Index. Data as of March 31, 2023.
For most investors, that just-right portfolio is somewhere in the middle. Papa Bear, in this instance, had the hot portfolio. He had many more years to work before retirement and was comfortable with the wild ride that a portfolio heavy with stocks can provide. Mama Bear, on the other hand, relied on a steady stream of income to fund her berry picking and honey hunting. Neither of these portfolios was wrong, they were just wrong for Goldilocks. She knew, as soon as she tasted the porridge, that hot and cold bowls were not for her.
Keep in mind that most of us don’t live in a fairytale world and could benefit from a guide to these decisions. One Vanguard study estimated that financial advisors can help clients earn an additional 3% from a combination of proper asset allocation, portfolio rebalancing and coaching. There’s no need to wander around alone in the woods.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. Does not offer tax or legal advice.