What should you know?
The best portfolio, and the best portfolio for you are not always the same thing.
The chart below shows the best year, the worst year, and the average annual returns of a range of portfolio allocations over the 93-year period from 1926 to 2019:
It is clear that the higher the allocation to stocks, the better the long-term returns.
However, the excellent returns offered by stocks come at the price of a bumpier ride – the variance of returns (aka volatility) is usually greater when stocks form a large part of the portfolio.
Why should you care?
Looking purely at the numbers, history shows that allocating investments to a portfolio of 100% global equities (the great companies of the world) is the best portfolio for all long-term investors.
However, it’s not only about the numbers. As a human being, you can be prone to making emotionally driven decisions, especially during moments of stress.
Therefore, while always maintaining the majority of the portfolio in equities, it is sometimes necessary to add an allocation of other assets, such as bonds, to a portfolio. This will decrease the expected returns but should generally make for a smoother ride.
The best portfolio for you is one that you can stick with throughout all the ups and downs that the markets throw at you.
