Why Basic Capital uses bonds

The Basic Capital portfolio requires a high allocation to fixed income investments or bonds. This challenges the the conventional wisdom of retirement investing. When planning for retirement, you’ll often hear the same guidance:

• Start with more stocks while you’re young.

• Don’t overreact to short-term swings.

• Shift to bonds as you get closer to retirement.

This approach is based on the traditional sources of investment returns in retirement accounts. Returns from price, or the value of assets going up, are the most familiar. The other source of returns are income, or the cash returns that investments pay in the form of dividend or coupon payments.

Stocks grow wealth primarily through their price returns. Those prices can be volatile in the short term, but over the long run they usually track the growth of the economy. Bonds, on the other hand, provide steady income and their prices move less dramatically, though their returns are typically lower.

The power of consistent income and diversification

We start with the stability and income that bonds provide, then use financing to bring returns closer to what stocks provide, but with less volatility.

This helps you put more of your money to work earlier in your career. But that’s not the only reason Basic Capital uses a high allocation to bonds:

• When you use financing for investments you want the source of your returns to be as predictable as possible. The income bonds pay is contractual and more predictable than the price movements of stocks. The consistency of their returns is why their prices are less erratic. Bonds’ more stable prices also help support the financing.

• The consistency of bond income is important to ensure that your Basic Capital financing is entirely self-funded, which means that your investment returns cover the cost of financing. You will never have to use your contributions to cover the financing cost. This gives you flexibility with your retirement savings. When life happens and you need to scale back your contributions, your Basic Capital account will continue to compound with investment income more than covering the cost of financing.

• While the exposure to potential upside of stocks is important, the market has become far less diversified in recent years with the largest seven technology companies now making up nearly 35% of the S&P 500. A decade ago, the largest companies accounted for just 9% of the S&P 500. This level of concentration is historically rare and it means the returns in your stock allocation are heavily influenced by the performance of a small number of companies.

What that means for your account

The income produce is credited monthly or quarterly, not daily, so it shows up in your account over time. This income covers the cost of financing, with the remainder reinvested into your Basic Capital to grow and compound. A portion of that reinvestment gets invested into stocks which give you exposure to market upside, while the bonds pay predictable income. This means your account performance will not always track the performance of the broader market exactly.

By emphasizing steady income and diversification, Basic Capital turns the stability of bonds into a foundation for long-term growth. This approach helps investors build wealth with less volatility and greater flexibility throughout their retirement journey.