Money Mindset

Chapter 6 Building Your Wealth

In order to give you perspective, I want to show you how stocks, bonds, and cash have performed historically. I also want to point out how crucial it is to have the proper asset allocation for your investment portfolio. In this chapter, I will explain all about asset allocation and asset classes including equity, fixed income securities and cash equivalents, the volatility of them all, and how to determine your overall risk tolerance.

Before I begin, let me highlight an interesting study by Joseph Davis, PhD, and Daniel Piquet of Vanguard, an investment company with more than $3 trillion in global assets under management. In 2011, Davis and Piquet wrote a white paper titled “Recessions and Balanced Portfolio Returns.” According to their study, since 1926, a diversified investor’s overall return didn’t dramatically change whether the economic environment was expanding or contracting. As long as the investor had a mix of 50 percent bonds and 50 percent stock, they averaged a return of around 5 percent per year, on a net return basis of factoring in inflation. Of course, past returns are no guarantees for future performance, but it does give an investor a sense of what is potentially reasonable to assume as a rate of return if they are equally diversified in equities and bonds. While past performance is not a guarantee of future results, smart investors in today’s modern world might take Mark Twain’s well known quote to heart: “History doesn’t repeat ...