Bonds Can Be Riskier Than Stocks
Historically, if you wanted income, you purchased income investments such as bonds or preferred stock. However, data suggests that stocks may be a better source of income.
This might seem implausible since most stocks do not have very significant dividends. (The average dividend of the S&P 500 is 1.3%.) The reason hinges on the fact that as stocks appreciate over time, stock dividends also appreciate. So you are continually receiving a higher dividend yield on your initial investment. More importantly, the price appreciation of stocks can be used as a substantial source of income.
Here Are The Facts
A study published in the AAII Journal (February 1998) indicated that a portfolio heavier in stocks provided a better chance of a retiree meeting his/her income needs than a portfolio of all bonds. For the period analyzed from 1926 to 1995, the data showed that if an investor wanted to draw 7% annually on their portfolio for 20 years after retiring, a 100% bond portfolio would have been successful in delivering the necessary income only 47% of the time. On the other hand, a portfolio of stocks would have been successful at delivering the required income 92% of the time.
If we look at the same data but only for the period since World War II, stocks show up even better than bonds as a retirement income source.
Stocks would have been successful 100% of the time in producing a 7% annual income while bonds would have been successful only 42% of
The best part about this study is that it takes into account that stocks can be more volatile than bonds. The study accounted for the fact that a retiree would need to take their 7% income even in years when their portfolio was declining in value and thus tests these hypothetical portfolios under a real-life scenario.
If you’ve been staying away from the stock market, worrying that it’s “too high” and relying on income investments to supply your retirement income, I suggest that you might be taking the more financially risky path. I know that stocks seem
Some bonds in your portfolio may be appropriate. But don’t rely solely on bonds for income. You need to include stocks and/or mutual funds to reduce the risk of outliving your income source.
Your Next Step
If you own bonds or are looking for income, please contact us.