When it comes to investing, there’s a widely held belief that bonds are the safer choice, particularly for those with substantial wealth. After all, if you’ve amassed a significant amount of money, why expose yourself to market movements when you can lock in the stability of bonds? But what if I told you that this conventional wisdom might be leading you down the wrong path?
Let’s start with a surprising truth: over the long term, stocks have historically been the more reliable store of value, not to mention a superior wealth builder, than bonds. This may go against your instincts or what you’ve heard from financial experts, but the data is clear. For more than 100 years, stocks have consistently outperformed bonds when viewed over extended periods, offering higher returns, especially after accounting for taxes and inflation, with less dispersion of those returns.
Source: Aptus via Shiller as of 06.30.2024
The catch? Stocks exhibit greater short-term volatility, which can make them seem a less likely store of value, especially if you’re not prepared to handle the market movements or don’t have a cushion for any short-term downsides.
The Importance of a Wealth Cushion
One of the biggest challenges with investing in stocks is the short-term volatility. Markets move up and down, sometimes dramatically, and this can be nerve-wracking if you need your money in the near term. But here’s the thing: the wealthier you are, the more cushion you have to absorb these short-term fluctuations. Your wealth allows you to invest with a long-term horizon, which is where stocks shine. The wealthier you are, the less you need to worry about short-term market movements because you don’t need to tap into your investments as quickly. This ability to ride out the ups and downs of the market is a significant advantage.
The Bond Trap
Let’s address a common argument: the idea that wealthier investors should own more bonds because the returns are more meaningful on larger sums. For example, earning 5% on $1,000,000 yields $50,000—a non-trivial dollar amount, especially compared to 5% on $10,000 that yields $500. But this perspective misses the bigger picture. While bonds may offer stability, they often fail to keep up with inflation and taxes, even over the long term. And here’s the kicker: the wealthier you are, the less you need to accept these negative real returns. Why settle for losing purchasing power when you have the option to grow your wealth through equities?
Shifting Your Perspective
It’s natural to be cautious with your wealth, but being overly conservative can erode your financial position over time even without a loss in nominal terms. The key takeaway here is that the wealthier you are, the more you should consider an even larger weight to stocks as the foundation of your portfolio. Not only can you afford to weather short-term market swings, but you’re also in a position to avoid the slow erosion of wealth that comes from over-reliance on bonds. Remember that conventional wisdom isn’t always right—and that in the world of investing, embracing a little more volatility can lead to much greater rewards without any incremental long-term downside.
Appendix: “Options” for Reducing Short-Term Noise
What if you could capture the equity premium while managing short-term volatility? For investors focused on maximizing long-term returns, portfolio hedging strategies offer a compelling approach. These techniques enable an overweight in stocks while providing a cushion against sudden market movements. By buffering against short-term downturns, investors may find it easier to stick with their long-term plans to achieve their financial goals. Although these strategies can be a bit more complex, they offer high-net-worth individuals the chance to maintain significant equity exposure and growth potential without compromising peace of mind.
Follow Up Reading
Portfolio Diversification: Beyond Bonds
The Long Game: Using Time to Your Advantage
The Case for Flexibility in Next-Generation Hedged Equity
Navigating Retirement: Balancing Drawdown and Longevity
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.
This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.
Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2409-19.