Your Investing Report Card

Greetings! 

Hope you’ve all had a great weekend. Each week, I will highlight one central idea for you to think through on your own. The goal, as always, is to break down the complex and make it as digestible as possible. 

This Week: Your Investing Report Card 

While reading through John “Jack” Bogle (founder of Vanguard) this morning, I stumbled upon a chart that might prove helpful for many of you; it certainly helps me think about the benefits and risks associated with three primary asset classes: stocks, bonds, and cash reserves (T-Bills). 

For Total Return, as should come as no surprise to those who have either read Bogle or who have been following my content, stocks receive an “A”, long-term bonds a “B”, and cash reserves a “C”. This makes sense if you think about the risk associated with investing in each asset class, and cash reserves “should” always yield the lowest return based on their risk free and short term nature. 

For Principal Stability: Stocks: C Long-term Bonds: B Cash Reserves: A. This, too, makes sense based on the “guaranteed” backing of bonds and treasuries by the US government. The volatility of large stock holdings is what most of us fear in the early years of retirement. 

For Income Growth, Stocks: A Long-term Bonds: C Cash Reserves: N/A, as the time horizon is too short to see investment returns over the long haul. This is why I base most of my investment strategies on large core stock holdings: if we’re looking for more, and most of us are, stocks holdings, historically, have simply outperformed other asset classes. This never means they will in the future, of course! (Or even that they will when you need them to do so!) 

And for Income Stability, Stocks: B Long-term Bonds: A, and Cash Reserves: C. The reason, again, that T-Bills fall short, here, is that they are maturing frequently, so there is always a potentially new interest rate risk associated with now getting lower locked in returns on the principal investment. 

My three biggest take-aways: 

1) Even though I am not a bond guy, and I advocate for large stock holdings in my content, note the nuance here: if you are looking purely for stability of income, that is where bonds thrive, especially (and usually only) if held to maturity. 

2) If looking for total return, yet again, we see that bonds have way more long term risk than we tend to associate with the asset class: credit risk, inflation risk, interest rate risk, etc., and that stocks are crucial, even in our retirement years! 

3) And to think of T-Bills as a different asset class from bonds is equally critical because of the quick reinvestment periods and inability to rely on any sustainable income over the long haul. 

Hope this gives you all some food for thought if any of you are still hungry after the turkey. 

Best to all, and hope you have a great week. 

Tyler