Principle 5: Balance “Now” and “Later” Risk
There is a trade-off between year-to-year swings in portfolios and long-run return. This chart shows how stock-heavy portfolios tend to have higher returns over time, but with greater swings from year-to-year than bond-heavy portfolios. Bond-heavy portfolios tend to have lower, but more consistent returns than stock-heavy returns. Picking the right mix of assets can go a long way toward the goal of maximizing long-run return without taking on excessive short-term risk.