We at blooom are occasionally asked why the recommended allocation from our proprietary glide-path includes (what seems to be) a rather heavy mix of stock funds over bond funds. Their question often stems from what I call the “Good Morning America” or “one-size-fits-all” allocation advice which carelessly recommends that you allocate the same percentage to bonds vs stocks as your current age. For example, if you are 33 years old – taking that advice for your 401k would mean you would allocate 33% to bonds within your portfolio. I am sorry, but when it comes to your 401k retirement savings – we think it is ludicrous for a 33 year-old (with possibly 25+ more years before retirement) to allocate 1/3 of their portfolio to an asset class that will most likely provide ZERO real return over the remainder of their working years.
Let me explain what I mean…but first, we need to frame our discussion around some factual, historical data (no opinions here). When most market historians look back at the market over time – it is common to reference the performance of the S&P 500, a broad mix of large US company stocks. Since 1928 through 2012 the average annual return of the S&P 500 has been a little better than 9%. Over that same time frame, the return of safe, short-term (3 month) US Treasury Bills has been about 3.5%. At first glance, the difference between these two may not appear that significant, but when we look at both of these from a another angle, the difference becomes massive. $100 invested in 3-month US Treasury bills back in 1928 would grow to be worth $1,971 by the end of 2012. But had you invested $100 in the S&P 500 back in 1928, it would have grown to be worth an astounding $193,219 by the end of 2012. That is one difference in bonds vs stocks.
Now granted, that $100 invested into stocks would have taken you on a pretty wild ride of ups and downs over the past 84 years whereas the investment into 3-month treasury bills would have bored you to sleep with consistent (albeit small) returns year after year. But if you don’t need to access any of that $100 investment for a long time (like your 401k for retirement for example) should the ups and downs of the stock market really affect you? We think not. This is precisely the attitude all young people should have concerning their 401ks. This is money that is intended for that glorious day in the future when you can smash your alarm clock for good. Endure the temporary downs so you can be around long enough to reap the rewards of the permanent ups. Your future retirement lifestyle thanks you!