The Value of Stocks, Bonds and Cash in Retirement Accounts

One picture says it all. A good blend of stocks, bonds and cash in a retirement portfolio allows for portfolio growth and also provides smoothing. In other words, the impact of volatility of assets can be reduced.

This is important as was demonstrated this week by the 4.6% tumble in the Dow Industrial Average.

Here's a chart of a portfolio of about 60% stocks and 40% bonds and cash. The cash portion is larger than the bond portion. The performance is over a 12 month period through February 6, and it compares the total return of the portfolio (thick line) including dividends to an index (thin line). In the chart the index is a "diversified broad market index that targets 97% market capitalization coverage of the investable universe".

The important thing is the way the total return mimics the index return. However, you will notice than when things got interesting in December to February, the large spike in the index and subsequent decrease was muted in the total return of the portfolio.  In other words, the portfolio did share in the gains and losses, but to a much lesser degree. Nevertheless, the portfolio in the graph has achieved a very nice 11.69% return over the previous 12 months.  Keep in mind that overcoming the effects of inflation while maintaining safety are the most important long term goals, IMHO.

This is not a recommendation but it is an observation.

What if we were fully invested in bonds? Here's a chart over the same period comparing the portfolio to a US bond index. The thin line is the performance of the bond index while the thick line is the performance of the portfolio. The bonds returned 1.46% over the previous 12 months:

The third chart is a potential "retirement ready" portfolio chart. This portfolio is comprised of 13 holdings currently 45% cash and bonds with 2.35% stocks, 1.5% commodities and the remainder in stock based mutual funds. This portfolio returned 4.06% over the previous 12 months: