Replacing up to 40% of your equities with bonds is a good idea if you think a stock bear market is imminent. Surprisingly, though, it might be a good idea even if you aren't worried about a bear market.

That's because a 60% stock/40% bonds portfolio performs almost as well over the long term as the 100% stock portfolio. The reduction in returns you incur when moving to the diversified portfolio appears to be a small price to pay for substantial risk reduction.

The table below presents the data. Consider first the past 50 calendar years -- from 1969 through 2018. A 100% stock portfolio produced a 9.8% annualized total return over that period (as measured by the dividend-adjusted S&P 500), while you would have made 9.1% annualized by allocating 60% to stocks and 40% to long-term Treasury bonds (and rebalancing yearly).

The hedged portfolio's reduction in return? Just 0.7 annualized percentage points.


100% stock portfolio

60% stock/

40% LT Treasuries

60% stock/

40% IT Treasuries


Annualized return

Standard deviation of yearly returns

Annualized return

Standard deviation of yearly returns

Annualized return

Standard deviation of yearly returns

Past 50 years







Since 1941







As you can also see from the table, you would have given up only a small amount more by allocating the fixed-income portfolio to intermediate-term Treasuries (maturity of just five years). Now the hedged portfolio's return reduction is 1.0 annualized percentage points.

Both of these differences represent the cost of insuring against a major stock bear market. Though only you can determine whether that cost is reasonable, most people are surprised to find that the cost is as small as it is.

You might object that the 60% stock/40% bond portfolio performed as well as it did over the past 50 years because interest rates were declining much of the time -- thereby increasing bonds' prices. But declining interest rates in fact play only a small role in these results.

Consider the bottom row of the table, which shows performance since 1941. That starting year was chosen because long-term interest rates then were just as low as they are today. And notice that the differences between the hedged and unhedged portfolios' returns are only slightly larger than over the trailing 50-year period.

Notice also from the standard deviations reported in the table that the 60% stock/40% bond portfolios are substantially less volatile (or risky) than the all-stock portfolio.

This means that you can allocate more of your net worth to either of the 60%/40% portfolios than you did previously to a 100% stock portfolio and still be more conservative than you were before. That should allow you to more than make up the diminution in long-term returns from moving to a 60% stock/40% bond portfolio.

To illustrate, consider what would have happened if, since 1941, you had invested 20% more in a 60% stock/40% LT Treasury portfolio than you otherwise were willing to allocate to an all-stock portfolio. This hedged portfolio's performance would have been 11.2% annualized, identical to that of the all-stock portfolio. And yet it would have been 23% less volatile. That's a winning combination.

The bottom line? Slow and steady does sometimes win the race.

Or, to use a baseball analogy: You don't need to go for a home run every time you're at bat. Striving for a good on-base percentage leads you to win nearly as many games, if not more.