Deciding the optimum percentage allocation of stocks and bonds is the single most important decision an investor can make for a portfolio. Finding the right balance for your portfolio depends on how much risk you can withstand.Stocks
While the potential to have higher returns through an abundance of stocks may seem attractive because the long run returns are exceedingly higher than bonds, they also present a greater risk. If you have a high risk tolerance, you would have more stocks in your portfolio because you can withstand the losses that occur in the process.
Over time a portfolio with a larger percentage allocation to stocks does produce greater returns, but you also need a portfolio that is able to withstand rough markets. Having the right mixture of stocks and bonds is essential to withstanding market changes.Bonds
Bonds are crucial to riding out and offsetting declines in the stock market. In periods of turmoil, bonds are crucial to mitigating losses. This comes with sacrifices in the long run, but it’s the difficult short run periods that make it easier to bow out. Equipping your portfolio with enough bonds will help you keep the courage needed to stay in the game during times of high stock market volatility.Your Risk Tolerance
The amount of risk you are willing to take should yield the appropriate return. If you are unsure if you’re receiving the right amount of returns for the proportionate amount of risk, calculate the standard deviation of your portfolio. You can also measure its success by measuring the portfolio’s correlation. It will give you insights into the success of your portfolio’s diversification.
The right balance will make the most out of market growth while controlling and minimizing risk.
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*This article does not constitute financial advice. Please refer to a Vimvest advisor or financial professional for financial advice unique to you and your financial situation.