Could Your Portfolio Withstand a 2% Shift?

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If you follow any of the work I do in corporate bonds, you know my mantra: We make money no matter what the market does!

What I mean by that is a bond portfolio will pay its minimum expected annual return, or MEAR, no matter what the market price of an individual bond does or what the bond and stock markets do.

This is based on the fact that the coupon, the fixed amount of money a bond pays per year, never changes. The price of a bond can move up 10% or even 50%, but the dollar amount it will pay will stay the same.

The reverse is also true. The price of a bond can drop by any amount, and you will still receive the fixed amount of money – the coupon, expressed as a percentage – from that bond.

All of your principal is returned at maturity no matter what the price does… but that’s for another time.

If the opinions of Robert Shiller and Warren Buffett can be relied on, this idea of making money no matter what happens in the market is going to be very important to a lot of people with and without gray hair over the next 10 years.

Here’s why…

Both Shiller, a Nobel Prize winner, and Buffett, the most successful person in the money business, have their own systems for guesstimating where the stock market will be in 10 years. If they’re right, the next decade doesn’t look too bright for an all-stock portfolio.

Shiller is the most optimistic of all of the analysts/money managers I follow. He expects the S&P to grow by 2.6% over the next 10 years. However, that’s not much.

We moved from 18,100 since the election to almost 27,000 before the sell-off started last October. You do the math. It’s a lot more than 2% in two years.

Buffett, on the other hand, thinks the S&P will lose 2% between now and 2028. I think this is the only time I’ve ever heard anything negative about the market from Buffett.

Both, however, are quick to state that their projections are not guarantees. In fact, the current market has outperformed all major forecasts from 10 years prior.

So much for market guesstimates.

But no matter whether it’s up 2% or down 2%, if you’re over 50 years of age and have an all-stock portfolio in any market, it’s an ultra-high-risk scenario.

The idea of being paid no matter what the market does, long term or short term, is the strongest argument for owning bonds.

In fact, it doesn’t only justify owning bonds, but it also shows how necessary it is to increase the percentage of bonds in our portfolios as we age.

One of the few absolute truths about investing is that the stock market will always move lower and then eventually move higher. But when you consider how much the market has moved up in the last 10 years, the downside of that statement becomes painfully obvious.

If you’re over the age of 50 and haven’t already shifted gears to a lower-risk, more predictable, more reliable portfolio that has a mix of stocks and bonds, you’re whistling past the graveyard.

The only way to protect yourself from the downside of the stock market – a 10-year period of no growth or worse, is to own your age in bonds: If you’re 60 years old, hold 60% of your portfolio in bonds. At 70 years old, allocate 70%.

Yes, I am absolutely certain of those numbers. This is the only way I know to negate the uncertainty of the next 10 years – or, for that matter, any period in the stock market.

Darwin said it best: It is not the most intellectual of the species that survives, and it is not the strongest that survives; instead, the species that survives is the one that is able to adapt best to the changing environment in which it finds itself.

Adapt your portfolio to your age or perish.

Good investing,


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