More Bonds Equals Less Performance

I have found two online investment advisor firms, Index Fund Advisors (IFA) and FutureAdvisor, that offer risk-assessed, customized Diversified Portfolios to their clients. IFA, by the way, has developed the best informational website I have ever seen. I have learned a lot from their website. You should visit it.

IFA offers Diversified Portfolios ranging from 100% Equity (with 11 different securities – see below) to 20% equity depending on the client’s propensity to assume risk, i.e. ability to endure the higher variation associated with 100% equity portfolios. All portfolios have the same securities, only the weightings change.

IFA's 100 Portfolio

This 100% equity portfolio has an expected return of 13.12% as is shown in the chart below:

IFA's RoR by Diversification Chart

But when the portfolio is reduced to 20% equity, the expected return falls to 6.55% as shown in the chart below.

IFA's 5 Portfolio ROR

The Point

The point is conclusively proved that as you add bonds to your portfolio, you are reducing the expected return from the portfolio. Only a portfolio that has 100% equity will give you the best chance to have the most money when you retire. Of course 100% equity increases risk, but Risk  is covered elsewhere.

Confirmation of “The Point”

FutureAdvisor also assigns portfolios according to risk. They show two portfolios on their website. The first is for a 34 year old who presumably has enough time to absorb the variation associated with a high equity/bond ratio. Here is a portfolio for the 34 year old. The Stock/Bond split is 92/8.

FutureAdvisor's Recommended Portfolio Graphic age 35, aggressive portfolio

Note the projected performance for this 92/8  portfolio in  “average market conditions”  is 7.9%.

Now the portfolio for the 50 year old, presumably less willing to assume the risk of volatile markets. His portfolio equity/bond ratio is 87/13.

FutureAdvisor's Recommended Portfolio Graphic age 50, aggressive portfolio

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