You’re Probably Overinvested in Bonds
The usual advice is to hold only 60% of your assets in stock. If you’re wealthy, a 90/10 split is far better.
By Robert C. Pozen
Chad CroweMost financial advisers tell their clients to hold a 60-40 portfolio—60% in stocks and 40% in bonds.
Stocks are volatile, and bonds can provide a counterweight when share prices fall.
But after more than 20 years in the money-management business, I’ve concluded that many investors hold too much in bonds and not enough in equities.
Plenty of people should hold bonds.
If you are retired and subsisting on your investment income, or if you would have to sell a significant chunk of your investments to cover living expenses in a bad year, you should have more in high-quality bonds.
But that probably isn’t true for two large groups: The six million to seven million Americans with $1 million or more in investable assets and other households with more than $100,000 in investable assets whose noninvestment income covers their cost of living.
(Investable assets include retirement accounts but not homes.)
For these affluent investors, a 60-40 portfolio means sacrificing the tremendous upside potential of stocks to avoid temporary losses.
Over any long period, they will likely be better off with a 90-10 portfolio—90% in a low-cost stock index and 10% in a money-market fund to pay unanticipated expenses.
Stock declines are relatively infrequent and typically are followed by increases—a recurring pattern over the past 60 years.
It happened again this year.
The S&P 500 was down 7.33% year to date as of March 30, largely because of the Iran war.
The index bounced back to plus-5.62% for the year by May 1.
Moreover, the 90-10 portfolio eliminates fees to financial advisers, who charge an average of 1% of assets under management.
You can build the 90-10 portfolio yourself simply by buying an index fund and a money-market fund, and rebalancing at the start of each year if stocks have gone up or down.
The argument for the 90-10 portfolio is based on many decades of stock prices.
During the 10 years ending Dec. 31, 2025, the average annual total return (with income reinvested annually) of the S&P 500 trounced that of 10-year U.S. Treasury bonds, 14.68% to 0.89%.
Although the difference was especially large in the past decade, stocks also beat bonds handily over all time periods of 20, 30, 40, 50 and 60 years ending with 2025.
If you invested $100,000 in a 90-10 portfolio for the 10 years ending on Dec. 31, 2025, you would have accumulated almost $356,000, compared with around $243,000 if you had a 60-40 portfolio.
For 40 years, the figures were $5.8 million and $2.5 million.
The return on the S&P 500 isn’t based on picking winners or ascertaining market sentiment.
It reflects the aggregate fundamental strengths of publicly traded U.S. companies.
By contrast, bond returns are driven by interest rates, which fluctuate due to macroeconomic conditions and government policies.
Notably, stocks have outperformed bonds during the two most recent bouts of high inflation.
In 1972 to 1982, when annual inflation averaged over 8%, the average annual nominal total returns of the S&P 500 were 7.74%, while the figure for 10-year U.S. Treasurys were 5.71%.
From 2021 to 2024, when annual inflation averaged almost 5%, the figures were 13.47% and negative 5.35%.
For more than a decade after the 2008 financial crisis, there was a bull run in bonds because interest rates fell and remained low.
But that scenario is unlikely to recur soon as interest rates normalize, inflationary pressures build, and neither political party seems to have the will to reform Medicare or Social Security, which the government will have to bail out by issuing more debt at higher rates.
Higher interest rates will also adversely affect stocks, but successful companies can raise prices, increase revenue and control costs, which will lead to higher nominal stock prices.
And stocks represent claims on the assets of publicly traded companies—plant, equipment and land—whose nominal replacement costs rise in inflationary terms.
Stocks also win over most bonds in terms of taxation.
Interest on bonds is taxed as ordinary income, at a top federal rate of 37% (though there are tax exemptions for municipal and Treasury bonds).
Dividends and long-term capital gains are taxed at a top rate of 23.8%.
There are two main arguments against the 90-10 portfolio.
First, that the stock market has frequent crashes.
The total annual return of the S&P 500 was negative for 13 of the past 60 years.
The years with the worst total returns were 2008, 2002 and 1974.
But each time, the S&P 500 posted strongly positive returns in the next two years.
In the past six decades, the S&P 500 has been negative for three consecutive years only once—in 2000-02, as the dot-com bubble burst.
The S&P 500 was down a total of 37.43%, but those losses were more than recouped by the end of 2006.
The S&P 500 was also down in both 1973 and 1974, by a total of 37.25%, due to the oil embargo.
Those losses were more than recouped by the end of 1976.
Second, that bonds can offset stock losses.
But bond returns were positive in only 10 of the 13 years when the S&P 500 was negative.
In 2022, when the S&P 500’s total return was minus 18.04%, U.S. Treasurys were down nearly as much.
Conventional wisdom has it that as investors approach or pass retirement age, they should hold less in stock and more in bonds.
But rising life expectancy expands their time horizon, and many households with $1 million or more in investable assets intend to bequeath a substantial portion of their assets.
Because of the step-up in basis at death, if your children inherit assets that aren’t in retirement accounts, they won’t be liable for taxes on capital gains earned during your lifetime.
If you are going to hold a 90-10 portfolio, you’ll need a plan for staying calm during market drops.
First, remind yourself that the stock market’s best days often follow its worst years.
Second, focus on how small one year’s drop in stock prices is relative to 30 years of returns, and see sharp declines in stock prices as buying opportunities.
Finally, think of the 10% in your money market fund as an insurance policy in the unlikely event that the S&P 500 stays down for more than a year.
Don’t miss out on the growth opportunity of a lifetime if you have a lot of investable assets.
Buy and hold a portfolio composed mainly of a stock index fund with a money-market fund as an insurance policy.
Mr. Pozen is a distinguished senior lecturer at MIT Sloan School of Management and a former president of Fidelity Investments.
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