Bonds and stocks (along with real estate, commodities, etc…) are inherently volatile. Therefore, the value of portfolios that hold these securities will also be volatile.

Having said that, investors must be willing to suffer through short-term volatility if they are to achieve long-term portfolio growth.

The amount of volatility (and long-term returns) experienced is largely driven by the allocation between bonds and stocks within the portfolio. In fact, some studies have suggested over 90% of volatility is driven by the bond/stock allocation decisions alone!

So, when we construct portfolios we must deeply understand both our financial and emotional capacity for risk / volatility so that we can make prudent, informed decisions about how to structure portfolios appropriately given our unique circumstances and financial goals. A topic I’ve previously written about here.

The chart below can help us begin to identify our emotional capacity for risk but only robust financial projections can help us identify our actual financial capacity for risk (i.e. how much of a loss can we tolerate before our financial goals / financial independence are jeopardized?). This is why I spend so much time on planning at the outset of relationships and updating projections each year.

I’ve charted the historical range of returns for stocks, bonds and various bond/stock blended portfolios over various time periods. This chart concept is from JPMorgan, but I’ve built my own to include data going all the way back to 1928 (the eve of the Great Depression) and added a few additional blended portfolios.


  1. Stocks (gray bars) have experienced a very wide range of returns over various time periods with stocks’ worst calendar year loss of almost 44% and best calendar year gain of almost 53%.
  2. Even bonds (light blue bars), especially when 2022 is included, have also experienced a wide range of returns. Bonds’ worst calendar year loss is about 17% (this year through 09/30/2022) and best calendar year gain of almost 33%.
  3. Surprisingly, a very aggressive blended portfolio of 20% bond / 80% stock (orange bars) had higher lows and higher highs than even a 100% bond portfolio for 10- and 20-year periods.
  4. Meanwhile, a very conservative 80% bond / 20% stock portfolio (dark blue bars) had the highest lows (i.e. least bad) for 5- and 10-year rolling periods compared to all the other options with its lowest 5 year annualized return of 0.6% and lowest 10-year annualized return of 2.7%. This 80/20 blend also had the tightest range for all time periods (i.e. least volatile) of the portfolios listed.
  5. The very conservative 80/20 approach never had a negative 5-year period.
  6. Stocks, on the other hand, have had negative 10-year periods!

One thing this chart doesn’t do a great job of is illustrating the impact various returns have on an investor’s portfolio values and financial goals.

In other words, as the time periods get longer we notice the range of returns shrink implying “less volatility” in return outcomes. However, the difference between the worst and best returns for those longer periods have a MASSIVE impact on wealth and financial independence.

For example, assume an investor retires with $1,000,000 and they maintain a 50/50 allocation (green bars) because they believe it’s well-diversified and somewhat conservative (at least compared to what they’re used to).

The long-term annualized return of the 50/50 blend was 7.6% implying growth of the $1 million portfolio to about $2.1 million over ten years (excluding expenses, taxes and withdrawals).

The worst 10-year period for that same 50/50 approach was a 2.4% annualized gain implying the $1,000,000 grows to just $1,267,000 (excluding expenses, taxes and, most importantly, WITHDRAWALS). In other words, if that investor (or pension fund or endowment) was relying on the 7.6% annualized return to achieve financial goals they are going to be sorely disappointed and will likely have to make major adjustments to their spending and/or other financial goals.

The best period, however, for a 50/50 blend produced a 15.7% annualized return over ten years implying the $1,000,000 grows to almost $4.3 million! What a MASSIVE difference in wealth and future lifestyle!!

As I’ve written about in the past, although short-term stock market returns are unpredictable, ten year returns are actually quite predictable. We can at least get in the ballpark. As I’ve said many times in these commentaries, the most reliable stock market valuations (those with the greatest correlation to subsequent returns) suggest relatively low returns for the U.S. stock market over the next decade. On the bright side, bonds are finally priced to deliver attractive returns over the next decade (attractive at least relative to the last fifteen years), and there will likely be attractive investment opportunities in stocks over the next decade.


Lesson #1
The first conclusion of this analysis is that investors need to be able to ride out short-term volatility in order to achieve long-term gains. It’s unavoidable and an inherent characteristic of investing. If an investor cannot do that than they shouldn’t be invested in such assets because they’ll inevitably buy high and sell low out of fear, which is catastrophic for long term returns.

Lesson #2
It is prudent and wise to assume lower returns within your financial projections from this point in time and adjust those projected returns each year when there are significant price movements in major asset classes. Extremely important financial decisions are based off those projections so if we’re using unrealistic assumptions (i.e. lazily relying on historical averages without regard to today’s valuations) we’re going to make poor financial / retirement decisions and setting ourselves and our families up for failure.

Sidenote: Two ways to overcome the fate of low returns is (1) potentially taking a more proactive approach to investment strategy as opposed to a static approach and/or (2) continuing to dollar-cost average into the market over time and resist the urge to stop contributions simply because markets are down. That’s precisely the time you want to be investing.


Past performance is no guarantee of future results.

Data taken from third-parties is believed to be reliable but accuracy is not guaranteed. 

This is not intended as individualized investment advice but merely as general education. This is a simplified analysis that includes only bonds and stocks, but there are obviously many other asset classes that can be included in portfolios as well.

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