Shaw’s Cove is a beautiful slice of paradise located in Laguna Beach. While growing up my friends and I spent most of our day at Shaw’s Cove. We went to Shaw’s because Main Beach would get too crowded in the Summer time.
We’d walk to Shaw’s equipped with three items: Boogie Board, snorkeling gear, and smashball. Throughout the day, we’d use all three things. If the waves were up, we’d ride our Boogie Boards. If there were no waves, we’d go snorkeling. When we got tired of being in the water, a rare event, we’d play smashball. We’d repeat this process until we got hungry. Our strategy prepared us well for all the beach conditions. It was our version of being hedged.
An investor should be prepared for all market conditions. A successful investor will own investments for growth, income and safety. These three investments will treat you well over the long term.
Stocks are owned for growth. The stock market is your long term, wealth generating machine. The stock market will play a huge part in creating your family wealth. The stock market does not rise every day or every year, of course. During the fabled history of the stock market, there have been major disruptions to the long-term trend. However, from 1926 to 2015 the S&P 500 has generated an average annual return of 10%.
Bonds are owned for income. Bonds are boring and stable and will also play a significant part in generating your family’s wealth. Bonds pay predictable income allowing you to receive monthly, quarterly or annual income. Bonds can also be owned for safety. When the stock market is falling, bonds will usually rally. From 1926 to 2015 long-term U.S. Government Bonds have averaged 5.6%.
Cash is owned for safety. Cash is king. It’s always nice to have some dry powder. Cash is safe and liquid. If you need access to capital, look no further than cash. When stocks or bonds fall, it’s nice to have cash on hand so you can buy them on the dip. Cash can help you ride out a stock market correction. With a strong cash position, you can afford to hold on to your stocks while they recover. From 1926 to 2015, cash, as measured by the U.S. T-Bill, has averaged 3.4% per year.
Stocks, bonds and cash are the cornerstone of a solid portfolio. These three investments work in concert to help you balance your portfolio. If you own more stocks than bonds or cash, you’re an aggressive investor. If you own more bonds or cash than stocks, you’re a conservative investor.
A portfolio with 70% stocks, 25% bonds and 5% cash generated an average annual return of 8.57% from 1926 to 2015. A $10,000 investment in 1926 is now worth $15 million.
A portfolio with 50% stocks, 35% bonds and 15% cash generated an average annual return of 7.47% from 1926 to 2015. A $10,000 investment in 1926 is now worth $6 million.
A portfolio with 30% stocks, 50% bonds and 20% cash generated an average annual return of 6.48% from 1926 to 2015. A $10,000 investment in 1926 is now worth $2.6 million.
As you can see from these examples, the more stock you own, the greater your long-term wealth. It’s important to match your asset allocation to your financial plan and goals. If your investments are in line with your goals, you’re likely to stick with your plan for the long haul.
I could not help concluding this man had the most supreme pleasure while he was driven so fast and so smoothly by the sea. ~ Captain James Cook
Bill Parrott is the founder and CEO of Parrott Wealth Management and a lover of the sea. To obtain more information on investment management and financial planning, please visit www.parrottwealth.com.
March 23, 2017
Note: Your returns may be more less than those posted in this blog.
 Dimensional Fund Advisors Matrix Book 2016.