What’s the best asset mix for you? You already know that your two major options are stocks and bonds. The choice between them represents a basic tradeoff: growth vs. stability. Investing in stocks is more likely to produce higher returns than investing in bonds, but with more volatility.

For most investors, it makes sense to hold both stocks and bonds in their portfolio and to be confident with this mix in either a bull or bear market. Lots of investors are tempted to increase their stock exposure during rising markets. Investor “FOMO” – the fear of missing out – sets in as the market climbs. But over time, a portfolio made up of mostly stocks will face dramatic swings in its value. That’s not exactly the type of roller coaster ride most of us want for our money!

On the flipside, a portfolio made mostly of bonds tends to have a significantly lower rate of return. Investors who are near or in retirement often wish to avoid the roller coaster ride altogether, selling most or all of their stocks and investing in bonds or holding cash. This type of portfolio can’t keep up with inflation and will end up seeing a gradual decline in real value over time. Instead of turning entirely to bonds, we mix them into portfolios that also hold stocks to provide stability.

The bottom line is this: Choosing the right allocation involves finding the right mix of stocks and bonds for each investor, based on their goals. Merriman advisors have thorough conversations with each client to assess risk tolerance and run financial modeling. This helps determine what the client’s portfolio can withstand. The combination of these two things – the emotions and the math – are essential in helping you achieve your goals. If you’d like to know more about our process or meet with an advisor to help with these types of decisions, you can contact us anytime.

The previous post in this series can be found here.