Opportunity Cost

Hi friends. One of the most important principles in investing is understanding not just risk, but also opportunity cost. When people think about bonds, they often focus on what they provide: stability, income, and protection during difficult markets. And of course, those benefits are real.

In fact, bonds serve two very important purposes in a portfolio. First, we use bonds to help fund goals that are less than 5 years away, and to provide a source of liquidity during market declines when clients may need cash for spending. By maintaining a portion of the portfolio in investments that are generally more stable than stocks, we can help ensure that near-term needs are met without being forced to sell stocks at temporarily lower prices. We have found that this added level of security often makes it much easier for clients to remain disciplined and stay invested through periods of market volatility and declines.

Second, bonds can provide a source of opportunity during market declines. Rather than simply weathering a downturn, investors can use a portion of their bond holdings to purchase stocks while prices are temporarily down. This allows bonds to play an active role in the portfolio by helping investors rebalance, remain disciplined, and potentially enhance long-term returns by buying long-term assets at more attractive prices.

So, this isn't a story about stocks versus bonds. It's about understanding the role that each asset plays. The challenge arises when bonds become a long-term growth vehicle rather than a strategic tool.

The numbers are striking. Over a 10-year period, a $1 million investment grew to approximately $2.95 million in stocks compared to about $1,053,000 in bonds. That's meaningful, but perhaps not that surprising. What becomes truly remarkable is what happens as time compounds. After 30 years, stocks grew to more than $17 million, while bonds reached about $3.4 million. And after 50 years, stocks exceeded $251 million compared to roughly $21 million in bonds. A more than 10x difference. Now, that is a huge opportunity cost.

Bonds can help investors survive market declines. They can provide stability, income, and liquidity when it's needed most. But history shows that for long-term growth, stocks have been the primary engine of wealth creation. The lesson isn't to avoid bonds. The lesson is to use bonds intentionally for stability, for flexibility, and for opportunity, while recognizing the significant cost that can come from sacrificing long-term growth for too much short-term comfort.

The goal isn't to eliminate volatility. The goal is to ensure that the price we pay for stability doesn't become the price we pay for achieving our long-term goals. Thank you, and I look forward to talking with you next Friday morning.