The diversification power of bonds

Even with just 3%

The last few posts have been all about bonds and the message is simple - they have less return but less risk than stocks. After all the analysis, despite the diversification benefits, holding a large bond allocation is too detrimental to our goal of getting more return than the S&P 500. Thus, a 3% allocation with a 2-5% range seems about right.

Even though all of that is pretty well decided, I just wanted to take one last look at the diversification power of a 3% allocation. In the chart below, every time period where a 97 / 3 stock and bond portfolio has more standard deviation than the S&P 500 is highlighted in red. Shockingly, even with just 3% allocation, there is literally no red. Every single time period we look at in the last twelve years has less standard deviation:

The consistency of these results gives us confidence that our portfolio can achieve its goal of reducing volatility even with a low allocation. We can get the pros of bond investing without taking on the liability of missing out on too many gains. That’s awesome!

Our portfolio now has stocks, bonds, gold, and Bitcoin. In our early analysis, we saw that real estate was never part of an optimal portfolio. Let’s do a little more research on that just to assess a potential 0% allocation in the next few posts.