Most financial advisors recommend a combination of stocks and bonds in an investor’s portfolio.
The percentage bonds usually increases as the investor ages. The assumption of this diversification is that it provides protection in a market correction but at what cost.
Many experts claim that there are extended periods where bonds outperform stocks. In a period where interest rates fall from 15% to 3% over 40 years bonds can outperform stocks at times. However, in the current environment where interest rates are stable bonds can’t outperform stocks when the S&P is 7 percentage points above bonds.
For bonds to be effective in liquidation events they need to be specific bonds not bond funds. Bond fund drawdown can exceed stocks.
In a 5 year period where you may have one significant correction, it has to exceed 35% because that is the lost opportunity cost you incurred holding bonds instead of stocks.
In the case of the Stars model the lost opportunity cost of owning bonds is 26% per year.