Over the last 15 years the S&P 500 returned 6.5%, dividends included. The Treasury market has returned 6.1%. If you had purchased 15-year notes you could have gotten 7% and saved yourself a lot of trouble. The same types of returns hold for the last 10 or 5 years. Treasuries have returned about the same or better than the stock market, without all the heartache.
So why bother having a balanced portfolio at all? One reason is diversification. We don’t know what the future holds. So it makes sense to divide up your holdings into different assets, security types, industries, and even regions of the world. “Give your portion to seven, yes to eight, for you do not know what disaster may come upon the land.”
Another reason is to enhance returns. If you rebalance strategically, when assets are a about 10% above their target, research shows that you can add 1-2% to your portfolio annually. Mind, that sounds easier than it is. It meant selling stocks in ’99 and buying them in ’02 and ’08–selling what’s hot and buying what’s not. But the world has a funny way of not ending. If you can keep your head when everyone else is losing it, to paraphrase Kipling, you’ll be a lot better off.
Finally, things change. Backward-looking analyses always depends on the endpoint, which right now has uncharacteristically low interest rates. It’s not hard to envision a return to normal growth, normal inflation, and a normal yield curve. If that happens, bond returns won’t look so good.
Seigel said we should invest in stocks for the long run, while Keynes noted that in the long run we’re all dead. A balanced approach is aware of the past but looks with confidence to an uncertain future.
Douglas R. Tengdin, CFA
Chief Investment Officer
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