How a Fed Rate Hike Affects Stocks

The hints of a Fed rate hike have been fairly constant since before the year started. The earliest guesses wrongly put the hike in June. Some have said September. The reality is nobody knows. It’s that uncertainty that gets people worrying about how it will impact their portfolio.

The funny part about all this is people have complained about low rates for six years. Now people are worried about getting what they wanted. But at what cost? Continue Reading…

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…

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…

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…