The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money

Chapter 7. Portfolio Performance: It's All in the Mix

Our Stock-Bond Split Powers Our Investment Results

The decisions don't get much bigger than this.

How should you split your money between stocks and more conservative investments, such as high quality bonds, certificates of deposit, and money market funds? As the last chapter suggested, this basic mix will heavily influence how erratically your portfolio performs in the short term.

But it should also drive your long-run return. Want to boost your nest egg's performance? Forget trying to pick high-flying stocks and winning mutual funds. The road to success may be far, far easier.

Bolstering Returns

Let's start with the obvious. We can't expect stock-like returns from high quality bonds, certificates of deposits, and other conservative investments. And, unless things go badly wrong, we shouldn't get bond-like returns from our stocks over the long haul. Indeed, the basic asset-allocation decision—how we divide our money between stocks, bonds, cash investments, and hard assets—is one of the most crucial financial choices we make. This key decision not only drives our portfolios' short-term fluctuations, but also it will have a huge impact on our long-run performance. The implication: If we want to improve our returns, we might simply allocate more of our money to stocks.

Suppose you have 60 percent of your money in stocks and 40 percent in bonds, and you expect stocks to clock 10 percent a year and bonds to notch 5 percent. With a 60 percent ...