As part of the continuing education aspect of UVstocks.io, we will cover the fundamentals of investing every so often. This week we’ll go over stocks & bonds and discuss the differences between the two. Most portfolios consist of a blend of both. The ratio and mix depend largely on your risk tolerance and financial goals.
Stocks
When you buy a stock, you own a small piece of a company. In exchange for the price you pay, you can expect the possibility of a return on your investment in the form of dividends and/or price increases as the company grows. You can also lose the entirety of your investment if the company folds.
Bonds
Bonds, on the other the hand, are known as a fixed income asset because when you own bonds you’re paid at a locked-in interest rate against the loan that was created when the bonds were issued. You then get your principal back upon maturity. The chances of losing your whole investment are lower with bonds than they are with stocks.
Blending Both
A commonly prescribed ratio for most individual investors has historically been 60/40 stocks to bonds. The idea here is that with a majority of your portfolio in stocks, you can see higher returns while hedging risk with bonds to serve as ballast when equities fall. But this ratio cannot always guarantee protection. In 2022 when the Fed was battling the worst inflation rate in decades, both stocks and bonds plummeted.
I personally invest 90%+ in stocks currently—a majority of which resides in S&P 500 equities—and plan to migrate toward 100% this year, resulting in stocks, some cash and no bonds. Given my long-term financial goals, and the fact that I’m long the U.S economy, I intend to weather the inevitable storms (corrections & crashes) and maximize returns in order to see the tremendous benefits of compounding interest over the next several decades.
Stay the Course
Although past events do not guarantee future performance, here’s why I’m optimistic. The following is a breakdown of historical returns of stocks & bonds from 1928 - 2022. Note the market was down in 2022 but up in 2023 and 2024.
20% equities / 80% fixed income
Long-term average (5.90%)
Normal midyear expected drawdown (-5.40%)
Expected "worst-case" drawdown (-24.40%)
40% equities / 60% fixed income
Long-term average (7.10%)
Normal midyear expected drawdown (-7.80%)
Expected "worst-case" drawdown (-30.80%)
60% equities / 40% fixed income
Long-term average (8.20%)
Normal midyear expected drawdown (-10.20%)
Expected "worst-case" drawdown (-37.20%)
80% equities / 20% fixed income
Long-term average (9.40%)
Normal midyear expected drawdown (-12.60%)
Expected "worst-case" drawdown (-43.60%)
100% equities
Long-term average (10.50%)
Normal midyear expected drawdown (-15.00%)
Expected "worst-case" drawdown (-50.00%)
So considering the above coupled with my intention to go all in with stocks, my family and I will need to prepare ourselves mentally, emotionally, and financially for the very strong possibility that our investments will, at some point or another, be cut in half for a period of time. Our goal is to yield at least the long-term average of around 10.5% while always working to outperform, leveraging the data and insights provided by UVstocks.io.
My kids receive this newsletter and the UVstocks.io daily email, and we often discuss investing. We talk about how to spot great businesses and identify good leadership, not only for investment purposes but for personal aspirations as well. And I’m always reminding them about the power of compounding interest.
Here’s a quick story I recently told them and will leave you with this:
Imagine this, from 1973 to 1974—right around when your grandparents were just starting out—the S&P 500 fell 40% with peak-to-trough declines nearing 50%. So if you invested $1 million in the S&P 500 at the very end of 1972, you’d have to watch that million plunge to $600K over the next two years. But by doing nothing, staying the course, and keeping your money in the S&P 500, your $1 million would have not only fully recovered but would’ve compounded to over $200 million by the end of 2024. Take a moment to consider that…
"The two most powerful warriors are patience and time." — Leo Tolstoy
P.S. I'm sharing some investment information, but it's important to remember that what I'm providing is for informational purposes only and should not be construed as financial advice.
Happy Investing,
John
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