This month, our chart selection illustrates the elements necessary to construct a portfolio that aims to deliver a 7% percent return.
To get a 7% return in 1995, an investor needed only to be invested 100% in quality bonds without having any stocks in his or her portfolio.
Ten years later, in 2005, we had to replace half the bonds with stocks to generate the same 7% return.
The stock basket included 25% large caps U.S. equities, 5% small caps, 10% international equities, 5% emerging markets, as well as 5% in real estate.
In today’s low-interest-rate environment, to get the same 7%, a portfolio needs to be even more aggressive—almost 90% in stocks and 10% in high-yield bonds.
Note that the volatility an investor needs to tolerate, measured in standard deviation, has increased over three times since 1995, from 6 to 19%, just to achieve the same result.
The Key Takeaway?
Today’s investors need to scale back on return expectations or cultivate an increased tolerance for volatility if they hope to fulfill their long-term objectives.
On behalf of TWM Group, thank you for watching our Chart of the Month. See you next time.
