could anyone help me better understand this question?
What if an investor held 50% of their portfolio in stocks, and the remaining 50% in safe bonds. That is, at the beginning of each month, they make sure that 50% is in stocks, and the rest in bonds.
How does the risk of this portfolio to compare to the risk of stocks alone? Bonds alone?
- Net Advisor™Lv 71 decade agoFavorite Answer
This question could actually by a book or thesis:
First, there are inherit risks investing in stocks and bonds. There is even risk in investing in cash and CD's!
Stock Risk = Varies widely by a company's balance sheet, (assets/ liabilities, cash flow, earnings, projected earnings, etc), industry risk, economic trends, consumer trends, price/earnings ratio and such relative to competitors, market position (dominance), company management experience, etc., there is a whole host of potential risks. However historically stocks have outperformed all other investments over time - as long as they didn't go bankrupt!
Bond Risk = Credit quality of the bond. Normally AAA bonds have a lower degree of risk, than say CCC rated bonds. Unless the AAA bonds are MBS - Mortgage Backed Securities, but that is another conversation. A lower credit quality could have higher default risk - hence loss of principle.
Cash/ CD Risk = Inflation risk. Where lower returns than the inflation rate will decrease one’s buying power over time.
If one bought bonds in GM for example which were once thought to be "safer," are probably looking at bonds that are worth pennies on the dollar today.
The higher the interest rate or "coupon" on a bond relative to its credit rating and peers, the higher the risk of the bond. Thus an AAA bond will pay less than a BBB bond. A BBB bond will pay more than a AAA bond, but the BBB bond is significantly higher in credit (default) risk.
Bonds are backed by the full faith and credit of the corporation that issued them.
Stocks are not guaranteed by anyone.
There are other risks but this is a general profile.
Depending on your age, financial goals, income, etc., having 50% in bonds or stocks could be deemed risky or too conservative.
Someone who is in their 20's with 50% in bonds could miss out on the longer term growth of owning equities during their lifetime, and dollar cost averaging should be used on a monthly or bi-monthly basis.
Someone who is in their 70's having 50% in stocks might be deemed risky because they may not have time to ride out the volatility.
Proper risk management including hedging can be used to reduce risk on equities.
Hope that helps.
It would be incorrect to assume that a particular mix of assets (stocks, bonds and or cash/ cash equivalent) would produce a particular rate of return. Not a single licensed financial advisor nor the SEC would ever tell you that; as it would be misleading and a compliance violation for assuming future performance.
VolatilitySource(s): --- Finance & Risk Management Consultant --- fmr Securities Compliance Officer/ Registered Principle (FINRA Series 24)
- Anonymous1 decade ago
I'm pretty sure your portfolio would be less volatile with a 50 pct bond allocation. The trick in getting good returns is to lessen the volatility of your portfolio. For example, lets say you bought a stock at 100 dollars and it dropped 50 pct to 50 dollars. To get back where you started that stock would have to rise 100 percent. Now if that 100 dollar stock only dropped 20 pct to 80 dollars, you would only have to go up 25 pct to return to the previous value of 100 dollars. Bonds will make your portfolio less risky because they generally act as a hedge in your portfolio lessening volatility. However, in bull markets they may limit your returns. An all bond portfolio is the least risky, however your returns will be limited compared to an all stock or 50/50 stock bond allocation.
I want you to look at this link below. It is linked to the discussion forums on morningstar.com where there is a thread which shows the returns of an all bond and all stock portfolio since 1921. Very interesting information contained in that thread.
- 4 years ago
I would say a simple Free Gift offered to you and Pure Religion, James 1:27 is not hard to understand at all! (The 'rest' are confusing!) God is not the author of confusion! (Acts 4:10-12.) True Christianity is a 'walk' with Him. (The 'rest' are just trying to sell you 'something'!) <')))><
- Robert MLv 71 decade ago
Study after study has shown that portfolios invested in different kinds of assets perform better and are less risky than portfolios that are heavily weighted toward one type of asset. Some research, in fact, suggests that your investment results depend more on how your assets are allocated among stocks, bonds and cash than on the actual investments you choose.
50/50 mix would provide average return of 10.9% with 8% volatility.
100 stock would provide average return of 12.5% with 12.7% volatility.
100 bond would provide average return of 8.5% with 7.7% volatility
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- Anonymous1 decade ago
Isn't it obvious?
Its risk is directly in the middle of the two extremes... Unless i've mis-understood the question.