Final answer:
To secure a 6% return on investment, an investor may need to reconsider their asset allocation due to the tradeoff between risk and return. Stocks offer higher returns but are more volatile, while bonds are more stable but generally yield lower returns. The investor's risk tolerance and time horizon are critical in determining the suitable mix of stocks and bonds for their portfolio.
Step-by-step explanation:
If someone is looking for a 6% return on investment and is considering allocating their portfolio with 90% bonds and 10% stocks, it's important to understand the relationship between risk and return. Stocks have historically provided higher returns than bonds over the long term, but they come with greater volatility. Alternatively, bonds tend to offer lower returns but are generally more stable than stocks.
To achieve a specific return target like 6%, an investor may need to adjust their portfolio to include a higher proportion of stocks, depending on current bond yields and expected future stock returns. However, it is crucial to match one's investment strategy with their risk tolerance and investment horizon. For instance, young individuals with a longer time to retirement may benefit from a higher allocation to stocks, whereas those closer to retirement may prefer the stability that bonds provide, at the cost of potentially lower returns.
To calculate the potential returns of an investment, you can use the formula: Principal + (principal × rate × time). For example, an investment of $5,000 at a 6% annual rate over 3 years would yield a total of $5,900.