Diversification At Its Best - SPDR S&P 500 Trust ETF (NYSEARCA:SPY) | Seeking Alpha

Diversification At Its Best - SPDR S&P 500 Trust ETF (NYSEARCA:SPY) | Seeking Alpha



This is an outstanding article about the value of holding bonds through TLT while also being in the stock market through the S&P 500 (SPY). Since 1992, holding 100% of either TLT or SPY resulted in almost the same return with less volatility in TLT.  Wynn Capital believes that stocks have a greater possibility of decline than bonds even though some people say the bond bull run is over.  In other words, as interest rates rise, the capital gain loss in TLT will probably be minimal compared to a greater possible loss in stocks.



The author presented data that showed an 80/20 SPY/TLT allocation resulted in an annual gain of 9.8%, which was more gain than SPY alone with a lot less volatility.  The portfolio was balanced each January.  For example, using 2013-2014, the higher gain SPY was reduced from 2013 while TLT was increased in 2014, and this re-balancing was spot-on for this year since TLT is up significantly.  Each year one asset is bought at a discount while the other asset is sold at a premium.



Next, the author ran the numbers on a 60/40 SPY/TLT allocation, and the annual gain was still 9.8% while the volatility was reduced to almost as much as TLT alone!  Then, the author did a 40/60 SPY/TLT ratio to cap things off, and the annual gain was only slightly lower at 9.5% while the maximum draw-down dropped all the way to 16% which was lower than TLT alone.  So, this article shows the great importance of always holding a significant portion of bonds through TLT.