TSLA
Tesla
-- 462.280 NVDA
NVIDIA
-- 140.220 AMD
Advanced Micro Devices
-- 126.290 PLTR
Palantir
-- 82.380 RGTI
Rigetti Computing
-- 11.3500 
How to Balance Stocks and Bonds: For the Cautious Investor
TL:DR
Cautious investor wants good returns but less risk
Bonds less risk, less return. Stocks more risk, more return. Mix them together; moderate risk, moderate return.
Bonds can’t beat inflation by enough, stocks have the potential to beat inflation by a lot.
(2024) Bond yield average 3%, (2024) stock yield average 13%.
Your portfolio plan must be around 10-20 years, needs commitment and monthly affordable top ups to dedicated to your bond and stock components
Split your portfolio 50-50 stocks-bonds for 8% ave return. To play safer do 40-60 stocks-bond for 7%, and so on.
Commit to this plan above all, do not mix around the funds based on emotion, just keep calm and keep at it.
In my previous post, I made a summary of Benjamin Graham's 1st chapter of the Intelligent Investor where he outlined the differences between investing and speculating.
In this post I'm going to focus on cautious investors; people who are unsure about investing due to lack of knowledge, capital , confidence and really don't want to lose their hard earned money. In my personal experience I think most people do not possess the extensive knowledge required to make sound and informed decisions on stocks to invest, and that lack of knowledge increases risk and makes the average investor more cautious.
Most of the family and friends I talk to who are hesitant to begin their investing journey all share this cautious approach.
Well I want to show you guys there's a way to both keep your caution while also investing in the market all while assuming lower risk.
And the way to do this is a healthy balance between the stocks and bonds in your portfolio.
Balancing Bonds and Stocks:
When it comes to your portfolio, the cautious investor wants to balance their gains with risks, most of the time a higher return strategy will involve a higher risk.
And if you are a cautious investor who can’t afford such risks, bonds are your solution. Government bonds, fixed deposits and AAA corporate bonds, can guarantee your principal and give you a decent interest after your investment matures (except for corporate bonds). All great right?
But because these investments have a lot lower risk, their issuers in return pay you a much smaller return in interest. The latest SG government T bill was 3%,
The highest fixed deposit currently is DBS at 3.2%.
https://sg.news.yahoo.com/7-best-fixed-deposit-rates-025123526.html
https://sg.news.yahoo.com/7-best-fixed-deposit-rates-025123526.html
And US investment grade bond average yield is at 4.78%.
Now this seems decent, until you see 2.1% as October’s core inflation rate. In fact Core inflation while a good average is not always an accurate barometer of inflation, because different people are affected more or less by different types of inflation eg;
(Retirees are mainly affected by utilities inflation, but a family of working adults and children, could be more affected by food and transportation inflation.)
(Retirees are mainly affected by utilities inflation, but a family of working adults and children, could be more affected by food and transportation inflation.)
So if I was spitballing I would raise the actual average inflation to somewhere around 2.5-2.6%. That is the rate at which your savings are losing their value.
So a bond return of about 3%, would only yield us a positive growth of around 0.5%. We have our security but our gains are only small steps. In addition to growing, our investments and savings must always beat inflation in order to retain purchasing power.
If you like bonds but find the application process too tedious, consider money market funds that invest in bonds. They allow you to easily invest your money with the clicks of of a few buttons. My personal favourites are the Fullerton Money Market Funds that invest mostly in government bonds and bank bonds/fixed deposits. Two instruments I find very secure and they also give a daily return and an easy withdrawal so no need to wait until your bond matures to get your return on investment. While managing my mother's money these were some of the returns MMF's got for her.
Some months you can tell she took money out and she kept in ranges from 10k to 20k, now you don't need that large amount to start and you can keep as small as a dollar in them, but if you have any amounts of Idle cash set aside and want to get a passive return from them while being risk free Fullerton could fulfil your bond component.
Now lets take a look at stocks; owning a share of a publicly traded company and its price dictated by market sentiment, that on occasion will even pay investors a dividend.
You can pick your stocks but to keep it simple we are just going to take a look at the S&P 500 index. A robust, well diversified set of top 500 companies listed in the US, from all sectors of industry. Just this year alone, from 18 december 2023 to 18 december 2024, the S&P500 gave investors a return of 27.65%.
Now time for some math so bear with me here. In a year there is an average of about 252 trading days, now lets say you picked a daily DCA plan into an S&P 500 stock, your average return would be around 13-14%. Since 1957, the S&P 500 has returned an average 10.26%, so expecting a return around this range over a long investment horizon is acceptable.
But stocks can still go down, even the S&P 500 has had a negative yearly return, 27% of the time at an average negative return of - 13%. The way to overcome this, is simply to hold your position for a long time, by adopting a long investment horizon. I’d personally recommend 10-20 years to reduce your risk, but you can go even longer if you want more security, and shorter if you don’t mind the risk.
So now that we understand the difference in risk and reward in both bonds and stocks, we can deduce that incorporating both into your portfolio is a perfect way to have security and also decent returns, all thats left is finding the right balance.
Benjamin gives a simplified view of holding more bonds during high bull markets and holding more stocks during low bear markets. (25% stocks and 75% bonds during market ATH) and (75% stocks and 25% bonds during market lows). However for the average defensive investor, knowing how to time the markets and know the highs and lows is impossible, so I wanna tackle this in a different approach.
Instead of deciding on our allocation first, lets try and decide our ideal return first. (Take into account your retirement plans, money goal plans and savings plans when coming up with this number) For me personally I want to get about 1.2 million in net assets (inflation adjusted), before I retire. And to get there I need about an 8% return on my overall part on average, yearly.
If bonds would yield about 3%, and stocks 13%, I would need to allocate my port at about 50% bonds and 50% stocks and if I had done this at the start of 2023, my average return would be about 8%.
(3x50)+(13x50)]/100 = 8% return required
But if you are fine with a slightly lower return you can play it safer with a bond-stock 60-40 split at 7% or 70-30 at 6%. They key to deciding this balance is first deciding what our goals are, then committing to this split.
The next paragraph is for more knowledgeable investors, if you are not confident in your knowledge, simply disregard the lower paragraph and follow the advice of committing to your pre-determined split.
Now you can have some leeway to commitment when it comes to adding fresh funds. Lets say your getting a bit uncomfortable with the stock market, and want to hedge your bets with more bonds. Do not, touch the funds already set aside in your bond portion or stock portion or shift them around, simply when it comes to your next monthly fresh fund top up, you can allocate more to your bonds. And if you are more confident in stocks or think a bear market is a ripe opportunity for a long term investment, you can allocate more fresh funds to your stock component.
The whole point of this committed balance is to remove emotions from the equation of investing. The market mostly moves based on emotions, retail traders do not have enough (insider) knowledge, and the prices move on supply and demand, which are based on emotional desires and has little to do with underlying values.
But thats okay, when you remove emotion, and just stick to a consistent, thought out investment plan, over a long period, you will get a decent return on investment and you will beat all those other investors who try to time the market or actively trade.
Market up, don’t celebrate, just keep at it. Market down, don’t cry, just keep at it. Historical data shows us that investors who had this mindset, have won big.
Thats all for my article for now folks, if you would like me to elaborate on anymore ideas in this topic, or other topics, or just any questions in general, feel free to comment below!
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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Iamwhoiamlah : A detailed and good interpretation!
ZhukovHatesPepsi OP Iamwhoiamlah : thanks! if you ever want me to research a topic and write about it just let me know