Why You Should Be Taking a Hard Look at Your Investments Right Now

Because stocks have produced higher returns than bonds have, this portfolio emphasizes stocks, but holds a sizable dollop of bonds because they typically hold value, providing stability. Bonds didn’t do the job in 2022. When interest rates rose, bonds fell along with stocks. But at least with this kind of portfolio, there’s a record of what the risks and rewards have been.

Whether to choose a more conservative portfolio (with more in bonds) or an aggressive one (with more in stocks) is a thorny issue. I’ll return to this problem in future columns, but for now, let’s keep things simple and focus on a basic 60/40 portfolio, invested only in U.S. stocks and bonds. (Personally, I favor a more complex, internationally diversified asset mix.)

Higher Highs, Lower Lows

Here is how a 60/40 portfolio, tracking the entire U.S. stock and investment-grade bond markets, would have performed from 1926 through 2023, according to Vanguard:

• Average annual return, 8.7 percent.

• Worst calendar year, 1931, with a return of minus 26.6 percent.

• Best year, 1933, with a return of 36.7 percent.

For comparison, here’s a pure stock portfolio. It has higher returns but lower lows:

• Average annual return, 10.3 percent.

• Worst calendar year, 1931, with a return of minus 43.1 percent.

• Best year, 1933, with a return of 54.2 percent.

If you could own stocks only in the good years, that would be ideal. But you can’t. As Todd Schlanger, a senior investment strategist in Vanguard’s Investment Strategy Group, said in an email: “It’s worth noting that the best year for stocks came shortly after the worst. This pattern is not uncommon as we have found the best and worst returns for stocks tend to be tightly clustered across markets, making timing them a difficult task.”

Bonds are less flamboyant. Here are the historical returns for a pure investment-grade bond portfolio. The worst year for bonds happened recently:

• Average annual return, 5.1 percent.

• Worst calendar year, 2022, with a return of minus 13.1 percent.

• Best year, 1982, with a return of 32.6 percent.

Control What You Can

In short, stocks produced better returns over the long haul, but at the cost of periodic steep declines. Bonds were less spectacular but more likely to have been there for you if you needed the money in any given year.

By increasing the proportion of stocks in your portfolio, you are probably increasing your potential for rewards — at the cost of sharply increasing your risk of big losses. That’s what happens to many people if they haven’t rebalanced.