One of the toughest tasks for investors — and it can be equally tough for financial advisers trying to help investors — is determining how much of a retirement portfolio should be in equities and how much in bond funds.
In fact, this is one of the three most important decisions that every investor makes. The other two are selecting the best asset classes and selecting the best funds.
If investors were purely rational beings, this wouldn’t be much of a problem. Statistical probabilities can guide us to stock-bond allocations with varying levels of predictable return and risk characteristics. But in the real world, investors are people who have emotions.
When the stock market is declining, real-world investors often want to own lots of bonds and fewer stocks. This not only feels good, but it’s easy to rationalize. After all, your money won’t do you any good unless you can keep from losing it.