Why a Long-Term Portfolio Needs Both Growth and Stability

Investing is often described as a search for return. That description is accurate, but incomplete. A thoughtful investor is not simply attempting to earn the highest possible return. The more meaningful objective is to earn a return sufficient to achieve a particular purpose while accepting only those risks that are necessary, understandable, and financially tolerable. This distinction helps explain why a long-term portfolio may include both higher-volatility equity assets and lower-volatility investments such as U.S. Treasuries, international government bonds or investment-grade corporate bonds. At first glance, the combination can appear contradictory. If equities offer substantially higher return potential, why dilute that potential by holding lower-return bonds? Conversely, if bonds provide greater stability, why accept the uncertainty associated with equities at all? The answer is that a portfolio is not strengthened by maximizing a single characteristic. It is strengthened by combining assets that perform different functions.

Equities represent ownership in businesses and provide investors with participation in economic growth, innovation, productivity, and corporate earnings. Over long periods, equities have historically produced considerably higher average returns than high-quality bonds. That difference is not accidental. Investors generally expect to be compensated for accepting the greater uncertainty associated with owning businesses rather than holding contractual debt obligations.

The contrast has been particularly pronounced over the past decade or so. During that period, U.S. equities produced returns substantially greater than those available from a broad portfolio of investment-grade bonds. As of mid-2026, the S&P 500 had generated a double-digit annualized price return over the preceding ten years, while the broad U.S. investment-grade bond market produced a much more modest return. The specific results depend on the dates, index, duration, and treatment of dividends, but the larger point is clear: investors who accepted equity volatility were rewarded far more generously than investors who primarily owned high-quality bonds. (1)

That recent experience can make the case for bonds appear challenging. If one asset class has produced substantially higher returns, why not allocate nearly everything to it? The problem is that average return and experienced return are not the same thing. Equity markets may provide excellent returns when measured over several decades while still producing long periods during which investors earn very little, experience repeated losses, or wait years to get back to a previous high watermark. Averages compress the journey into a single number. Investors, however, must live through the stock market one year, one withdrawal, and (potentially) one decline at a time. A long-term average equity return does not arrive in an orderly sequence. It may include several years of extraordinary gains followed by a severe decline. It may include a decade of disappointing results followed by a powerful recovery. It may also include long stretches during which corporate earnings grow but investor returns remain limited because valuations were unusually high at the beginning of the period.

Bonds serve a different purpose. U.S. Treasuries, international government bonds and investment-grade corporate bonds historically offer greater stability and more predictable cash flows than equities. Their returns have historically been lower, sometimes substantially lower, because investors are accepting less economic uncertainty. A bondholder has a contractual claim to interest and principal. An equity owner has a residual claim on the uncertain future profits of a business. The lower expected return of bonds is therefore not a defect hidden within the portfolio. It is, in a sense, the trade-off for stability.

This does not mean bonds are risk-free or that their prices never decline. Bond values can fall when interest rates rise. Corporate bonds carry credit risk. Inflation can erode the purchasing power of fixed payments. Longer-maturity bonds can experience considerable volatility, as investors were reminded during the sharp increase in interest rates earlier in this decade. Stability is relative, not absolute. Nevertheless, high-quality bonds will ordinarily fluctuate less than equities and may provide income, liquidity, and a potential source of capital when stock markets are under pressure. They may not be expected to win the race over several decades, but winning the race is not their only job. Their purpose is also to make it more likely that the investor can remain in the race. This last point is, in my opinion, one of the most important in investment management: in an overall portfolio, stable assets or assets that are non-correlated to the stock market often give more cautious investors the confidence to invest more in the market than they otherwise might.

In investing a portfolio, it is critical to consider how much uncertainty can be accepted in pursuit of return and to consider whether the portfolio is appropriately compensated for accepting that uncertainty. Historically, adding lower-volatility assets may reduce the portfolio’s expected return, but it can also reduce the severity of losses, improve liquidity, and create opportunities to rebalance when equities decline. This is particularly important because the mathematics of losses is unforgiving. A portfolio that declines by 50% must subsequently gain 100% merely to return to its starting value. Avoiding some portion of a major decline can therefore have a meaningful effect on long-term compounding, even if the stabilizing assets produce lower returns during favorable markets.

One last point on this topic: the sequence of returns matters as well. For an investor who is still accumulating assets and making regular contributions, a prolonged equity decline may create opportunities to purchase shares at lower prices. For an investor who is withdrawing from the portfolio, the same decline can be far more damaging. Selling equities after a large loss may permanently remove capital that would otherwise have participated in the eventual recovery. Bonds can provide a source of spending (liquidity) during those periods, potentially allowing equities more time to recover.

The Stoics (yes, it has been a while since I referenced Epictetus or Marcus Aurelius) distinguished between what is within our control and what is not… a fundamentally valuable perspective on almost ALL aspects of life. As investors, we cannot control market returns, recessions, interest-rate decisions, elections, wars, or the emotional behavior of other market participants. Investors can, however, exercise some control over their allocation, liquidity, diversification, spending, and response to uncertainty. A portfolio with assets that do not correlate or look similar is an expression of that distinction. That portfolio does not attempt to predict every future event. Recent equity market performance does not necessarily diminish the role that high-quality fixed income may play within a diversified portfolio. It may actually make disciplined portfolio allocation more important. Strong past returns can encourage investors to view volatility as a temporary inconvenience rather than a genuine risk. These same past returns can also create the impression that the recent relationship between stocks and bonds will continue indefinitely. Perhaps it will. Equities may continue to outperform bonds over the next decade, as long-term capital-market theory would generally lead us to expect. But that outperformance may not arrive smoothly. It could include a severe bear market, several years of stagnation, or a prolonged period during which equity returns fail to compensate investors for the volatility they experience. The fact that equities offer higher expected returns does not mean they will produce higher realized returns over every relevant period. Expected return is not a promise. In fact, expected return is generally viewed as compensation investors seek for accepting greater uncertainty.

Of course, a portfolio comprised of a mix of assets will occasionally feel disappointing. During a strong bull market, bonds may appear unnecessary because they restrain the portfolio’s return. During a prolonged period of weak equity performance, stocks may appear unnecessary because they create volatility without producing an obvious reward. At other times, rising interest rates may cause both stocks and bonds to decline, leading investors to question whether diversification still works. This dissatisfaction is not necessarily evidence that balance has failed. It is often evidence that the components are performing different jobs. A diversified portfolio should rarely contain only the assets that are currently leading the market. If every holding is thriving for precisely the same reason, the portfolio may be less balanced than it appears.

Let me touch very briefly on balance/moderation. Even before the Stoics, we had the Greeks, and one famous Greek, Aristotle, described virtue as an average between extremes, not as a simplistic midpoint, but as an appropriate response shaped by circumstances… and who doesn’t want to be virtuous?! Portfolio balance can be understood similarly. It is not necessarily a mechanical allocation of 60% to stocks and 40% to bonds. The appropriate balance depends on the investor’s goals, time horizon, spending needs, tax circumstances, financial flexibility, and tolerance for uncertainty. What matters is not adherence to a universal formula, but a reasoned relationship between risk and purpose.

A long-term investor needs equities because stability without sufficient growth can create its own form of risk. Inflation, longevity, rising expenses, and future obligations can gradually overwhelm a portfolio that is too conservative. Bonds may preserve the nominal value of capital more effectively over shorter periods, but a portfolio dominated by lower-return assets may fail to produce the growth necessary to sustain purchasing power over several decades. At the same time, the investor needs stability because return potential is valuable only if the portfolio and its owner can survive the periods of uncertainty required to earn it. Equities may offer substantially higher average returns, but the investor must be financially and psychologically capable of enduring the painful (and sometimes long) intervals when those returns fail to appear.

A portfolio with both high risk/return and low risk/return assets is therefore not a compromise between courage and fear. Properly constructed, it is an integration of ambition and prudence. Equities reflect confidence in human enterprise and future progress. High-quality bonds reflect respect for uncertainty, liquidity, and the limits of prediction. Life, after all, is full of trade-offs; your portfolio is no different. The objective is to build a portfolio capable of making meaningful progress in good conditions, remaining intact in difficult ones, and ultimately guide the investor toward the financial destination that their goals and objectives set out.