What Drives Returns In A 60/40 Portfolio

How much does each stock and bond allocation actually contribute to the total return of a portfolio? The easy assumption is that stocks do most of the work, since stocks outperform bonds historically.

To find out, I used the S&P 500 returns for stocks, 10 year Treasury returns for bonds, and rebalanced annually.

I threw all the data into a spreadsheet to get results for every allocation. To keep things simple, I’m only showing the 60/40 portfolio since that’s the typical allocation cited in most examples. Continue Reading…

Happy Hour: Default Nudge

Richard Thaler wrote an article in the N.Y. Times about how our behavior doesn’t always mesh with economic theory. Basically, our behavior conflicts with their math.

Thaler studies the idea of using nudges to get people to do something they wouldn’t normally do. Really, nudges lower or remove the friction that’s holding us back. These are things we know we should do. We know it’s a good idea. We just don’t want to do it…yet. Friction, of course, is whatever is stopping us from doing all the things we should do. Continue Reading…

What Dollar Cost Averaging Did In The Lost Decade

Bear MarketsThe U.S. stock market went nowhere for 12 years. Two bear markets that saw the S&P 500 fall by almost 50% – twice – produced this Lost Decade, where the market produced no return. Or did it?

While the Lost Decade makes for great headlines it ignores several realities from an investor’s perspective.

First, the S&P 500 was one of many asset classes you could have owned during the period. This chart shows how a diversified portfolio performed against U.S. stocks and other asset classes.

Second, if capital gains is the only return you’re focused on, you’re ignoring total return. Dividends were paid quarterly by S&P 500 index funds during the entire period. I used SPY, an S&P 500 ETF, to show this below. Continue Reading…

Happy Hour: Annual BRK Circus

Last weekend was the Berkshire Hathaway circus annual meeting. I spent most of that time reading through the notes and watching the media interviews from different sites (links are below). I won’t highlight anything specific, you can dig into it if you want. I will make two observations – on the enormity of Berkshire and learning from Buffett.

First, Berkshire is huge. It’s a ridiculous number of companies now (I don’t have the exact number, Google says more than 80?). The companies stretch into so many areas of the economy that Buffett knows how well the economy is doing, and can see major business/industry changes, before the Fed and anyone else. The information he gets from daily business updates gives him a huge advantage when buying new companies/stocks. Continue Reading…

Focus On What You Can Control

A big mistake every investor makes is trying to control things that are uncontrollable. They try to figure out where the market is going. They try to predict the economy. They try to find the best basket of funds that gives the best returns possible. They try to find the perfect stock.

When you spend all your time trying to optimize for the perfect outcome, and the results you want don’t materialize, you’re back at square one. Then you start the process all over. Investing isn’t about perfection because every year offers up a new best way to invest. There’s one problem. You don’t find out until after the year ends. Continue Reading…