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Financial management

How the right asset mix can lower your risk

Mixing different types of assets can cushion you from big swings in your account balance and lower your overall risk.
4 minute read

Each kind of asset has its own personality

Stocks tend toward the dramatic—they can be way up one day and way down the next. Anything from economic reports to marketplace rumors to natural disasters can sway them.

Bonds are more sedate. Their prices aren't as likely to experience swings in direction from day to day, and their ups and downs tend to be less exhilarating than those of stocks.

Cash investments are the calmest of all. Their value barely changes from day to day.

Perhaps you gravitate toward one of these "personalities" more than others. But holding a mix of them can be the best solution of all.

By mixing different types of investments together, you lower the overall risk in your portfolio, since different types of assets usually perform differently at any one time. This doesn't mean you can't lose money; it just means that you're better protected.

It also gives your account balance the opportunity to grow at a rate higher than you'd see with an all-cash portfolio, but in a more stable manner than you'd experience with an all-stock portfolio.

What are the 3 asset types?

Cash (short-term reserves)

Main goal: keeping a stable value. You probably won't lose money with these investments, but you won't gain much either.

Main risk: The rate at which you earn money could be lower than the rate of inflation.

Average return over time: 3.4%.*

Bond investments

Main goals: gaining a moderate amount of earnings in exchange for a moderate amount of risk; offsetting the larger risk of stock investments.

Bonds can be domestic (from the United States) or international. Having both in your portfolio helps spread out your risk even more.

Main risks: Rising interest rates could push bond prices down, and the bond's issuer could default.

Average return over time: 5.3% (for U.S. bonds).*

The bond portions of our portfolios are invested in Vanguard Total Bond Market II Index Fund and, where appropriate, in Vanguard Inflation-Protected Securities Fund (the proportions invested in each fund vary by portfolio).

Stock investments

Main goal: gaining larger earnings in exchange for a larger amount of risk

Stocks can be domestic (from the United States) or international.

Main risks: Stock prices could drop for a variety of reasons, including a company's poor performance and broad concern about the economy. Downturns in the stock market tend to be worse than downturns in the bond market.

Average return over time: 10.3% (for U.S. stocks).*

The stock portions of our portfolios are invested in Vanguard Total Stock Market Index Fund and Vanguard Total International Stock Index Fund (the proportions invested in each fund vary by portfolio).

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*All average return data covers the period from 1926–2019. For U.S. stock market returns, we use the Standard & Poor's 90 from 1926 through March 3, 1957; the S&P 500 Index from March 4, 1957, through 1974; the Wilshire 5000 Index from 1975 through April 22, 2005; the MSCI US Broad Market Index from April 23, 2005, through June 2, 2013; and the CRSP US Total Market Index thereafter.

For U.S. bond market returns, we use the S&P High Grade Corporate Index from 1926 through 1968, the Citigroup High Grade Index from 1969 through 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 through 1975, the Barclays U.S. Aggregate Bond Index from 1976 through 2009, and the Spliced Barclays U.S. Aggregate Float Adjusted Bond Index thereafter.

For U.S. short-term reserve returns, we use the Ibbotson 1-Month Treasury Bill Index from 1926 through 1977 and the Citigroup 3-Month Treasury Bill Index from 1978 through present.

All investing is subject to risk, including the possible loss of the money you invest. Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Investments in bonds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.