Stocks, Bonds, and Cash
One of the best ways to create generational wealth is to own stocks. Since 1926, stocks have averaged 10% per year and rise three-quarters of the time. Despite their stellar performance, stocks occasionally fall. As I mentioned, the S&P 500 has increased more than 20% this year, but it has dropped 3% or more about six times. During the COVID Correction in March 2020, the index fell 34%. In December 2018, it fell 17.5%. The popular index also suffered during the Great Recession, the Tech Wreck, and Black Monday, where it had several drops of 40% or more. Despite pullbacks and corrections, if you want to grow your wealth, you must own stocks.
Bonds are, mostly, consistent and boring – they don't do much. Bonds generate income and provide safety. They're predictable, but they don't grow. Vanguard's Total Bond Fund has earned 3% for the past ten years. A $10,000 investment in 2011, is now worth $10,300. Yawn. However, when stocks fall, bonds perform well. When stocks crashed in March 2020, bonds climbed 10.7%. During the Great Recession, bonds rose 1.23%, while the S&P 500 fell 53%. Bonds reduce risk and act as a hedge to stocks. If you want safety, a hedge, and income, then add bonds to your portfolio.
Cash is an investment class. The one-month T-Bill is a proxy for cash, and it's considered one of the safest investments in the world. The current yield is .04%. Since 1926, the one-month T-Bill has averaged an annual return of 3%, but so has inflation generating a net return of zero. The primary reason to own cash is for liquidity. If you need money, cash is king. Another reason to allocate assets to cash is to allow your stocks and bonds to perform over time. A strong cash position can give you the confidence to hold stocks when they're falling.
Stocks, bonds, and cash are essential ingredients for a diversified portfolio. Each asset class is designed for a specific purpose: stocks for growth, bonds for income, cash for safety. In fluid markets where the only constant is volatility, it's crucial to balance your investments across several asset classes.
But divide your investments among many places, for you do not know what risks might lie ahead. ~ Ecclesiastes 11:2
September 4, 2021
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
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