There's Always a Cost

When it comes to investing – like many pursuits in life – you can’t get something for nothing. With every choice there is an embedded downside.

There’s always a cost.

Take, for instance, the most basic decision you can make as an investor, which is the amount you invest in stocks versus bonds. In a broad sense, you can either invest heavily in stocks and hold an aggressive portfolio, or conversely, purchase mostly bonds and create a conservative portfolio.

Often, this stock-versus-bond choice is framed as deciding between higher or lower returns. And that is generally true over long periods of time. Each has a downside, however, that must also be considered.

Let’s say two people enter retirement with $1 million in investments on January 1, 2020. They need to withdraw $40,000 a year for living expenses. If the first person gets more conservative by rearranging their portfolio to be 50% stocks and 50% bonds, like most investors do at retirement, their portfolio value at the end of 2025 would be $1.2 million.

The second person, by comparison, maintains a fairly aggressive portfolio of 80% stocks and 20% bonds, unlike most retirement-aged investors.

The second person’s portfolio value at the end of 2025 would be $1.5 million, or about $300,000 more than the first investor’s.

That’s the risk. That’s the cost of being conservative – your portfolio will grow slower over time.

You can look at this scenario, though, through another lens.

There are two counterpoints to consider.

First, it’s been a good run in the stock market since 2020. Aside from 2022, during which the U.S. stock market fell by 19.5%, stock market values have generally gone up. Not all time periods will be like that. Second, by having higher exposure to stocks, the second investor faces a bigger risk of large drops in their portfolio value.

If in 2026 the stock market would repeat its performance from the year 2008, a terrible year for stocks, the first investor would endure a portfolio drop of $202,000. That’s rough, but not nearly as terrifying as the experience of the second investor. By having 80% of their account in stocks, the second investor would suffer a loss in value of $500,000 in that scenario.

That’s the risk. That’s the cost of being aggressive – you experience periodic bouts of heavy losses.

Your job as an investor is to figure out which cost is more painful for you and then build a portfolio that minimizes your future regret. You need to have a perspective about what you despise more: slower growth of your portfolio over time or big, sudden drops in value when the stock market tanks.

In a fantasy land, we could create a situation in which we capture all the upside of the stock market and then slide into bonds before stocks fall. And then shortly before they begin rallying again, we rotate back into stocks. That would be wonderful. We would all be rich.

It’s also impossible.

Your homework is to figure out which cost you are willing to endure. And then avoid changing your mind with the changing times.

You can’t get something for nothing. There’s always a cost.