What is durability? What does it mean to be durable? The Japanese writer Haruki Murakami puts it this way: “And once the storm is over, you won’t remember how you made it through, how you managed to survive. You won’t even be sure whether the storm is really over. But one thing is certain. When you come out of the storm, you won’t be the same person who walked in. That’s what this storm’s all about.”
According to our research, a hypothetical portfolio of 60 percent US stocks (S&P 500) and 40 percent US Treasury bonds (10-year maturity) has been returning investors approximately nine percent on average since the year 1940. That’s an average return developed over the course of eighty years. Of course, there are trading costs and taxes and other added considerations, but these are the return numbers for the asset classes. In any given year during this stretch, seeing this exact average show up would have been highly unlikely. Average market returns are formed by wildly different outcomes, bouncing unpredictably around an uncertain equilibrium over time. We are equally uncertain about whether or not the future will resemble the past.
And so durability will be the key. We’ll need a portfolio that can continue to be serviceable despite what may happen over the coming years and decades. A portfolio that can not only persist through the storm, but benefit because of it. Stock market storms create opportunities for those with the wherewithal to take advantage of them. Historically speaking, the classic 60/40 portfolio has been the right response to investing’s inherent uncertainty for generations of investors.
The Explorer missions began in 1958 and included some of the most durable spacecraft ever produced. Durability is one of the most important characteristics of any core portfolio. This classic mix of a targeted 60% allocation to stocks and 40% fixed income offers investors the opportunity to take an appropriate amount of risk while still having the ballast to get through a variety of market environments. The objective is to produce moderate growth without having to endure excessive amounts of volatility.
I’m a New York City-based financial advisor at Ritholtz Wealth Management LLC. I help people invest and manage portfolios for them. For disclosure information please see here.
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