Home

Investment Horizon, Diversification and Rebalancing

As we experience a rough October for global stock markets, we think that it is a good time to discuss equity returns and the benefit of having a long-term view. Over the course of the last 91 years, equities have returned about 10% annually. The 10% average gain comes with short-term volatility however. The chart below illustrates that the longer your holding period or investment horizon the more likely you are to experience gains. At Von Holt Financial Advisors, we preach a 5 year or greater investment horizon. As the chart below shows, having a 5-year horizon rather than a 1-year horizon reduces the chance of experiencing a decline from 26% to just 14% of the time. Stretching the time horizon to 15 years results in not a single period in which a loss occurred.

Chart was obtained through Morningstar.

A month like October also highlights the benefits of diversification by including bonds in a portfolio. The illustration below shows the impact on a portfolio of investing in bonds and rebalancing on an annual basis. While it may reduce the potential for gains in a particular year it also works to stabilize a portfolio when markets are declining, and produce predictable income through monthly interest and dividends. For an investor who has successfully accumulated sufficient assets to support a long retirement it is important to build a portfolio that will provide growth via stocks to protect your long-term purchasing power while holding bonds to limit the damage from short-term market losses and produce current income. As shown in the chart, during the 10 year time period from 2008 to 2017, a portfolio that was equally balanced between stocks and bonds, and rebalanced annually produced the same return as a portfolio that was 100% invested in stocks with much less volatility.

The Case for Diversifying and Rebalancing
2008-2017

In order to earn the long-term returns you will need to enjoy a comfortable retirement it is important that you maintain a long-term view, diversify with bonds to limit volatility and produce income, and rebalance your portfolio to enhance returns by buying low and selling high.