60/40 Portfolio Performance During Economic Cycles

Last week I broke down a 60/40 portfolio’s performance by decade. I was curious what drove performance in a diversified portfolio – stocks or bonds – and decades were a quick way to find out. But not the best way. It was pointed out that using economic cycles was a better way to break it down.

Thanks to some help finding the dates to changes in the economic cycle, and scrounging up monthly performance data, I was able to get a 60/40 portfolio’s performance during recessions and expansions. Continue Reading…

Happy Hour: Scare Tactics

Marketwatch published a scare tactic this week loading up several targets for the average investor to blame when they fail. It’s the typical one-sided drivel that’s heavy on noise and light on help.

By the end, the authors served up Wall Street, institutional investors, high frequency trading, regulations, CEOs, financial advisers salespeople, high fee funds, active managed funds, IPOs, M & A, the SEC, and computers.

Oh yeah. Don’t forget the wealthy. Somehow it’s their fault too: Continue Reading…

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…