One portfolio for life? |
Top of Form
Bottom of Form Written by Paul Merriman and Richard Buck | September 23, 2005 | Many do-it-yourself investors want solutions they can implement once, then leave alone. Can individual investors adopt a strategy that's so good it will meet their needs from age 21 to 91? In this article, FundAdvice.com Publisher Paul Merriman and Managing Editor Richard Buck tell why they think the answer is yes.
Much of the work we do is focused on helping individual investors find just the right combinations of assets and forms of investment ownership (IRAs, taxable accounts and the like) to meet their individual needs. Since everybody’s financial…show more content… Any portfolio worth holding “for life” needs to provide enough comfort to avoid emotional buying and selling while still providing a solid return. With proper diversification, this is possible. Let’s look at some numbers.
Using the database of Dimensional Fund Advisors, our research department computed some returns for the years 1955 through 2004, a 50-year period that included many different types of markets, including boom years, bust years and “sideways” years.
We began by comparing three potential portfolios. One was made up exclusively of the S&P 500 Index, an all-equity allocation that represents what investors might expect without any of the stability (and comfort) of fixed-income funds. The second was invested 60 percent in the S&P 500 Index and 40 percent in five-year Treasury notes. This is very easy for any investor to replicate.
The all-equity S&P 500 Index portfolio had an annualized return of 10.9 percent over that 50-year period. The 60/40 version’s annualized return was 9.6 percent. This was no surprise, because adding fixed-income funds to an equity portfolio almost always reduces return. In this case, the 60/40 mix achieved 88 percent of the return of the all-equity portfolio.
There’s only one reason an investor would adopt a portfolio that is almost certain to have a lower return: to reduce risk. This raises the question: Did the 60/40 portfolio do that? To quantify the answer during this