The stocks-vs-bonds allocation decision is the single most impactful investment choice you'll make — more so than which stocks or bonds you pick. It determines your portfolio's expected return and volatility across every market environment.
Historical returns: the baseline
| Asset | Annualized real return (1928–2026) | Worst single year |
|---|---|---|
| US Stocks (S&P 500) | ~7.0% | -43.8% (1931) |
| US Bonds (10-yr Treasury) | ~1.7% | -11.1% (2022) |
| 60/40 Portfolio | ~5.1% | -20.1% (2022) |
Why bonds in a portfolio (beyond "safe")
- Rebalancing fuel: When stocks drop 30%, bonds often hold or rise — you sell bonds to buy more stocks at low prices. This systematic rebalancing adds 0.5–1% to long-run returns.
- Sequence of returns risk protection: A bond allocation creates a "reservoir" to draw from in retirement during stock downturns without selling equities at depressed prices.
- Volatility reduction: A 100% stock portfolio can drop 50%+ in a crash. A 60/40 portfolio typically drops 20–25%. The psychological ability to stay invested matters as much as theoretical returns.
Age-based vs goal-based allocation
Age-based (rule of thumb): bonds % = your age. At 40: 40% bonds. This is too conservative for most healthy people with long retirements ahead. Goal-based is superior: match bond allocation to the time horizon of the money.
- Money needed in 1–3 years: bonds or cash
- Money needed in 3–7 years: 50–70% stocks
- Money needed in 7+ years: 80–90% stocks
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