Whether it’s water cooler talk, on the golf course, or between friends and family, you’ve probably had a conversation about your portfolio performance. From what I’ve witnessed, it’s either a chest out, head held high ‘I had an X percent return last year, how’d you do?’ or a less enthusiastic ‘I was down X percent last year.’ In the first scenario, the ‘winner’ is the person with the biggest return and in the second it’s the person with the smallest loss.
But it begs the question, are big returns really that important? I was curious to see how a stock-to-bond portfolio balanced 50/50, 65/35, 80/20 and 100/0 performed over the last 20 years. I used the S&P 500 index for the stock holdings and Barclay’s US Aggregate bond index for the bond holdings. Below are the calendar year returns for each portfolio for the last 20 years:
As expected, the portfolios with a higher weighting in stocks saw the largest returns. They also fell victim in the most negative return years, too, seeing the largest losses.
The 80/20 and 100/0 portfolio owners were able boast 20 percent of the time, each having four years of 20+ percent returns. They were also fortunate to have 10 percent returns nine out of the 20 years. The investor in the 50/50 portfolio didn’t see one 20+ percent year and had ‘only’ six years with returns between 10 and 19.99 percent.
Here’s what’s interesting, all four portfolios’ annualized returns were within 0.9 percent of each other. What’s more interesting, the 50/50 portfolio performed the best.
So, while the 80/20 and 100/0 portfolios each had nine, 10+ percent gains, they underperformed the 50/50 portfolio.
So next time you get dragged into a conversation about portfolio performance, remember the ‘winner’s’ outperformance for one year or multiple years can mean little to future (or past) results.