Savvy investors know that selecting the right mix of stocks, bonds and cash is key to meeting long-term goals. At least, that’s what we’ve been told — over and over and over.
But how have different combinations actually performed?
Mutual fund company T. Rowe Price (Stock Quote: TROW) has looked at five portfolios from the start of 1950 through the end of 2009, reaffirming the long-held belief that stocks are key to beating inflation and achieving maximum growth. Bonds and cash play supporting roles, stabilizing a portfolio during stock market gyrations and providing liquidity.
Over the 59 years, stocks provided the greatest return, averaging 11% a year. Bonds averaged 6.1%. The all-stock and all-bond portfolios duplicated those records.
Stocks, of course, are much more volatile, losing an average of 12.5% in the down years, for example, versus a 1.6% loss for bonds. Stocks had 14 down years, bonds had 8. Stocks' whipsaw performance was also reflected in standard deviation, a measure of an investment’s up and down swings. Stocks registered a high 18, bonds a much less volatile 6.4.
In addition to the all-stock and all-bond portfolios, T.Rowe Price looked at three with different asset mixes:
- The most conservative mix held 40% stocks, 40% bonds and 20% cash. It returned 8.1% a year, lost 11.5% in its worst year and gave up 3% in its average down year.
- A middle-of-the-road portfolio of 60% stocks, 30% bonds and 10% cash returned 9.2% a year, lost 20.4% in its worst year and surrendered 6.4% in its average down year.
- An aggressive portfolio of 80% stocks and 20% bonds, returned 10.2% a year, lost 28.6% in its worst year and fell 8.8% in its average down year.