What Is The Best Asset Allocation? | Stocks & Bonds

hey everybody welcome back to whiteboard finance my name is Marco and I'm here to help you master your money and build your wealth in today's video I want to talk a little bit about portfolio allocation and different models with their historic returns just because I see a lot of people going all 100 One Way 100 a

different way which is fine but let's have a little bit of nuanced conversation here I know that's kind of crazy uh on social media or on YouTube where you kind of find the golden middle but we'll do that here in this blog today so what I wanted to share with you was a pretty interesting article that Vanguard just came out with it's basically talking about their allocation

models so before I get into this entire study I actually just want to show you where they're getting these stats from because that's important so very quickly they're going to use certain indices so for the U.S stock market returns right here they use the standard and Poor's 90 from 1926 to 1957

and then after that they just use the S P 500 for the bond market returns that we're going to talk about they used the s p high grade corporate index from 1926 to 1968 and then they switched to the Salomon high grade Index Fund or index from 1969 to 1972 And then after that the Barclays U.S

long credit double A index thereafter and then for the U.S short-term reserves they use the botson U.S 30-day treasury bill index from 1926 to 1977 and then the ftse three-month U.S treasury bill index after that so let's start at the top so how do you choose how much you want to invest in

stocks or bonds so these models are just basically used as guidelines with different goals-based investment strategies I highlighted here in purple and also in yellow that there is no right or wrong model so it's important to find out what fits your goals and risk tolerance so before I get into this the reason personal finance and investing is not controversial but there's a lot of different takes is because a lot of

people are at different points in their lives some people are trying to accumulate wealth other people are trying to preserve it other people are older other people are younger and then other people have a higher or lower risk tolerance than others so that's why I think it's important to

actually take a look at this video and break all of this down so if we look at an income portfolio this has typically been reserved for lower risk typically older people they have minimal risk and they have a short to mid-range investment time Horizon this is not something that I would recommend for people that are starting in their you know 20s or even 30s at this point actually even

40s but we'll get into that later in this video so if we look at 100 Bond portfolio you can look at all of these historical risk returns from 1926 to 2021 that's basically what this entire study was modeled after and then I also broke all of this down into a spreadsheet here that we'll be we'll be talking about in the second half of this

video so let's fly through these real quick so 100 bonds you're getting an average annual return of 6.3 percent the best year was 1982 it was 45 and a half percent the worst year was 1969 was negative 8.1 percent and out of 96 years of tracking this there was 20 with a loss now if we move into 20 stocks eighty percent bonds you can see all the statistics here um average annual return

was 7.5 percent best year was 40.7 worst year was negative 10.1 and the number of years with the loss was 16 out of 96. if you go to 30 70 we're at 8.1 percent uh the best year was 38.3 the worst year was negative 14.2 and they had 18 years out of 96 with the loss and now we're moving into what we call a balanced portfolio so typically

when you talk to a traditional financial advisor they want to get you into a 60 40 portfolio 60 stocks 40 bonds obviously depending on your age some people use the 120 rule you can take the number 120 subtract your age from it and that's the

amount you should be in equities so if you take 120 say you're 40 years old you should be in an 80 20 portfolio if you want to be more conservative some people take it off 110 some even take it off 100 makes sense so if we go back to this balanced portfolio this is basically investing in both stocks and bonds to reduce potential volatility typically it's almost like an inverse

relationship and also has a lot to do with interest rates but investors that are seeking and comfortable tolerating short-term price fluctuations and they're willing to tolerate moderate growth and they have a mid to long range time Horizon this will typically be for people that are probably in their I don't know I'd say 30 to 50s actually not

even 30s I'd say 40s to 50s and then we'll get into growth later so if we look at a portfolio that was 40 stock 60 percent bonds you can see the average annual return was 8.7 best year was 35.9 the worst year was 18.4 and it had 19 out of 96 years with a loss if we look at 50 50 literally 50 stocks 50 bonds you can see that the average annual return is now increasing we're at 9.3

percent the best year was 33 and a half the worst year was negative 22 and a half and we had 20 years out of 96 with a loss now here's the uh the golden ticket the one that I just talked about the 60 40 portfolio which has absolutely gotten crushed in 2022 by the way 2022 is one of the worst years in history for the 60 40 portfolio and that's why we're going through these exercises

and going through these portfolio creation uh videos that I create so historical risk and return has been 9.9 percent average annual return its best year was in 1933 which is 36.7 percent its worst year was in 1931 actually 2022 is very close to this but 1931 was negative 26.6 and years with the law starts to creep up at 22 out of 96. so now this is where we move into the growth

portion of the video or the portfolio if you will so this is basically consisting mostly of stocks expected to appreciate taking into account long-term potential and potentially large short-term price fluctuations AKA a high risk High reward higher risk hopefully higher return so an investor seeking this portfolio has a high risk tolerance and a long-term investment time Horizon these are typically people that are starting to

invest these are people that are in their 20s 30s 40s and then you start to kind of go into balance and as you get older you kind of typically transition into income which we talked about in the very beginning of this video so let's check out a 70 30 stock portfolio so it's average annual return is a staggering 10.5 percent this is very good its best year was 41.1 percent its worst year was negative 30 percent you can see the

years with a loss is starting to creep up into the low 20s if we go to 80 20 we have an 11.1 percent return its best year was 45.4 percent its worst year was negative 34.9 percent and the years with the loss was 24 out of 96 and then here's where a lot of people watching this video already they may be younger they may be in 100 stocks there's nothing wrong with this but you have to be able to stomach the the risk with this that comes with it so uh 12.3 percent average annual return which is crazy in my opinion that's very high um its best year was 54.2 percent its worst year was

negative 43.1 percent uh and then years with the loss was 25 out of 96. so before we get into the second half of this video where I break all of this down in a spreadsheet and give you some more easily visualized metrics let's get into today's sponsor policy genius if you have a family you know how much your loved ones depend on you in a worst case scenario you wouldn't want

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see how much you can save okay thank you for sitting through that it helps fund the costs of running this channel so I put this together after I looked at that article this is just making it very easy to visualize all those different pies that we just looked at so this is not me recreating some price models or showing you what the dollar amount appreciation would be at the end of 96

years but this is pretty interesting just to see how this all kind of makes sense when you really break it down so I basically started here from a perceived list less sorry I can't even talk right now least riskiest perceived list that's actually hard to say perceived least riskiest try and say that three times fast perceived least riskiest so um we start with 100 bonds and end all the way down here with a hundred percent

stocks and this actually just makes sense I didn't sort these at all this is just going from 2080 30 70 40 60 50 50 all the way way down and you can see here the average annual return just increases with the amount of allocation to equities to stocks so you can see here that it's almost double if we're 100 bonds over 96 years you're

making average annual return of 6.3 if you're 100 stocks you're making average annual return of 12.3 literally almost double however if you look at the best year versus the best year here they're not that far off which is pretty crazy if you look at 100 bonds that was 45 and a half percent if you look at the 80 20 stocks and bonds it's actually underperformed that in terms of best year performance but this is not a metric that I would be um base my

portfolio on average annual return is the metric that you really want to look at depending on how much you can stomach so if you look at the worst year 100 bonds is actually in the single digits it was actually the worst year out of 96 years if you have a hundred thousand dollars in a portfolio you're losing eight thousand one hundred of that okay in one year now take a look at that on the contrary if you go with a

hundred percent stocks if you have a hundred thousand dollars in a portfolio you're losing forty three thousand one hundred in one year can most of you stomach this well uh so to put things into perspective if you look at the great financial crisis of 08 or if you look at um covid in March 2020 we're closer to that negative 43 than the negative eight so just use that as kind of like a metric in your brain uh to see if you'd be able to deal with that

emotionally now if you look at the years with a loss uh this the smallest number is actually the 20 stocks eighty percent bonds 16 out of 96 years which is 16.67 percent and if you look at the highest and the reason these are all highlighted in yellow is because these are the highest numbers highest losses highest annual return best

year years with the loss Etc et cetera and if you look at the 100 stocks we're at 26 out of the last 96 years and I'll be obviously this should go without saying but you know future results or past performance shouldn't indicate future results it can't no one has a crystal ball right we can go through the heat death of the universe and none of this matters right so what I'm trying to say is you can just use this as a

track record or as a historical performance to get an idea of what you think you'd be interested in terms of constructing your portfolio so the smallest one on record was 2080 highest was 100 and then you can see the percentages here out of the last 96 years percentage of years with a loss so if you're going into like 80 20 stocks and bonds are 100 stocks and bonds one-fourth of the time one out of every four years obviously you

can't you can't look at it you can't take that what I'm about to say at face value but out of these 96 years a quarter of them were losses if that makes sense so hopefully you got some information or gleaned some information out of this this is pretty um self-explanatory but it's nice to see the numbers backing this up as investors we are compensated for the amount of risk we take on okay so if you're investing in a

savings account uh you know you should be earning money on that and that should be an almost guaranteed uh rate of return unless there is a bank run or something like that now if you're investing in a startup you should expect asymmetric returns because you're investing in something that's been historically incredibly risky right you know it's hard to find that you know Big Exit or that unicorn if you're investing in small

businesses same thing with stocks if you're invested in 100 stocks that's definitely going to be more volatile and more risky than 100 bonds even though the last couple years that hasn't been the case but historically it has been so uh all this to say you should be compensated for the amount of risk you're taking on and that's why you need to be

cognizant how you construct your portfolio or if you look at it at a pot as a pie you need to understand what slices and how big of a slice you want to allocate to certain things so as always thank you for watching and have a prosperous day um actually I'm going to end the note on saying whiteboard Finance University is ready to be rolling here in the next month or so I know it's been a work in progress but uh we figured out the tech stack I have a landing page

that's built all the graphic design work is in progress and we just need to upload some of the initial videos that are in the school so if you guys don't know about whiteboard Finance University it's basically just a gym membership for financial education uh it's just a monthly fee you get access to me via live streams every week you get access to three different professors one is a person

who owns 400 single-family units uh he's a the real estate Professor we have a personal finance blogger who's written for all the biggest blogs out there Investopedia nerd wallet all them and then also we have the uh a charter financial analyst which is a prestigious designation in terms of stocks

and equities those are it's actually a very hard designation to get takes a number of years he is the stock market Mentor if you will or a professor and you have access to all these people all throughout the membership so hopefully that piques your interest if you want to sign up check out the

sign up page below that will be live in about a month or so thank you so much everybody and have a prosperous day okay so I'm not going to end the video on anything funny but if someone gave you a million dollars right now and you had to pick one of these portfolios which one are you sticking your million bucks in you

cannot touch it and it has to be in there for 15 years so we're not going to go short term we're not going to go multi-decade we're gonna go 15 years which one of these portfolios would you pick thank you