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.
This example assumes that dividend and interest income is withdrawn each year. The change in principal value of each investment reflects capital appreciation only. For illustrative purposes only and does not represent any specific portfolio or any particular investment. The information provided is based on a hypothetical $100,000 investment in the indexes shown as of 01/01/2000. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company. Past performance is not a reliable indicator or guarantee of future results. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Index returns do not reflect the deductions of fees, trading costs or other expenses. The Index is referred to for informational purposes only: the composition of each Index is different from the composition of the accounts managed by the investment manager. Investors may not make direct investments into any index. Past performance may not be indicative of future results.