I was on the Bayside High School Math Team. We focused on numbers and the logic of all things. When I got to Wharton Business School, my interest in psychology and emotion blossomed as I learned the degree to which our emotions directly impact our financial decisions. One area where this plays out dramatically is with our investment allocation decision.

What’s an investment allocation? Put simply, when you invest in your retirement plan at work, you're making an allocation decision. For example, if 50% of all your retirement savings are in stocks and the other 50% are in bonds/fixed income, you have chosen a 50/50 allocation. (I will cover the allocation decision for shorter-term goals (other than retirement) in a future newsletter.) 

Jeremy Siegel was one of my professors at Wharton. In his book, Stocks for the Long Run, he shows historically and consistently, over the past 200 years, the surprising differential between the returns of stocks and bonds. He argues that, based on the evidence and logic, most of us should have the majority of our assets earmarked for retirement in stocks. 

While there’s an abundance of historical evidence suggesting that diversified index stock portfolios outperform bonds over time, many of us have a substantial amount of money in bonds. Our emotions may tell us to allocate more money to bonds because they offer less volatility or more peace of mind, especially in the short-run, even though they have, historically, earned less money over time. A higher bond allocation can feel safer, more comfortable. But what’s the opportunity cost in going this route?

There’s no right answer here, and no one perfect allocation for everyone. As a financial advisor, I have recommended a range of allocations to my clients based on their age, resilience in the face of past market downturns, the ratio of their spending to their total assets, and other factors. 

I’ve been studying investing for 40 years. I’ve advised clients through every major market downturn since 1987 and I've observed the same pattern repeatedly: investors who can set aside their fear and base their decisions on the historical data have built more wealth. I can’t say if this historical trend will continue, but we have no evidence suggesting a different strategy for money earmarked for a 20+ year retirement. 

Here’s a hypothetical example based on historical investment returns. This hypothetical situation is based on long-term average returns for the S&P 500 index (stocks) and Intermediate Treasury Bonds over the period 1930-2024. I wanted to include the Great Depression in the calculation. The average returns were 9.1% for the stocks and 5.9% for the bonds. This data is from NYU Stern's School of Business comprehensive dataset.

Nick and Amanda, both 30 years of age, work for the same company and earn the same compensation. They are both anxious about the markets and the world, but Nick reacts by allocating 20% of his 401k plan to stocks and 80% to bonds. Amanda decides to just follow the historical evidence and allocates 80% to stocks and 20% to bonds. They each contribute $12,000 into their 401k plan per year for 35 years, and they both retire on the same day when they turn 65. They have lunch to celebrate their retirement, and they reveal the amounts in their 401k plans: Nick has $1.3 million and Amanda has $2.6 million. She has twice as much money, not because she worked longer hours, but because she made an allocation decision and learned how to manage her reactivity to the higher short-term volatility of her investments. 

If you can learn to manage your emotions, whether through meditation or simply looking at your portfolio on a monthly or quarterly basis instead of daily, you have the potential to earn more money. 

Your situation is unique, and there are no guarantees that the future will mimic the past, but the fundamental question is: will you let fear or evidence guide your investment decisions?

At the very least you should know how you’re answering that question. 

*  *  *

P.S. Stock markets have rebounded and produced superior returns to bonds despite: the Civil War, WW1, the Great Depression, the 1937 Crash, WW2, the Korean War, the Vietnam War, the hyper-inflation of the 70s and 80s, the Iraq war, the dot com bubble, 9/11, the 2008 crash, the 2020 pandemic crash, the 2022 crash, and the 2025 crash. Maybe human beings are more resilient than we can imagine. Or maybe this resiliency is disappearing. There are no guarantees, but I’d rather make decisions based more on evidence than my emotion.