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…

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…

The Benefit of International Diversification

Keynes QuoteWhat happens if you only invest in the U.S. stock market and it goes no where over a longer period of time, say a lost decade? Your stock allocation, built to grow your money, just failed. Something needs to pick up the slack. And there’s no guarantee your bond allocation will come through.

Enter international stocks.

At first sight, it may not seem like it matters when you compare the long term returns of U.S. stocks (S&P 500), international stocks (MSCI EAFE), and a 50/50 split since 1970. As the table below shows, having a portion of your stock allocation diversified internationally doesn’t improve your returns, but you don’t really lose much either. Continue Reading…

How Avoiding Big Market Losses Impact Returns

Avoiding Big LossesWe love to make money, but we hate to lose money even more. The ultimate investing strategy is the one that never loses money. Except that strategy doesn’t exist. The next best option is to control your investment risk to avoid the biggest losses.

Lets imagine someone gifted enough to guess every losing year in the stock market. Of course, it’s more then just picking the losing years. They’d have put their money in cash for the losing years but be invested in the market for every other year too. They’d have to bat 1,000 and stick with it over time.

The chart below shows exactly what their performance would look like, minus the losses in blue. Continue Reading…

Why You Must Invest In Stocks

Why You Must Invest In StocksImagine having to save, dollar for dollar, what you need in retirement. Now add in inflation. Your dollars need to keep up with the rising prices of all that stuff you’ll want and need in retirement. You’d have to out save that anchor slowly dragging down your dollar’s purchasing power.

This is why you invest.

Your money must keep up with the rising cost of inflation. In truth, inflation is what you’re really trying to beat when you invest.

Saving money is the first step in everyone’s process. Step two is to protect your savings from, and grow it faster than, inflation because your savings goes further when you do. Continue Reading…