And you are tucking a little something away for retirement, yes?*
A few years ago, the investment firm of Neuberger and Berman did a study of investments and the money they made between the Standard & Poor 500 Index (This is an index mutual fund that tracks the top 500 largest "blue chip" American companies. Household names like Microsoft, General Motors, IBM, GE, and others); the other 50% went into five-year Treasury Notes. What they found out was highly interesting, and highly important to your investment future.
N & B discovered that, between 1960 and 1996, an investor that had 50% of his assets invested in the S & P 500 and 50% in five-year Treasury Notes earned an annual compound rate of return of 9.75% for the whole period. This was 84% of the total return of 11.1% for the S & P 500 by itself.
Now, you could have gone for a 100% stock exposure and earned yourself a percent and a fraction more than with this fifty/fifty deal. But you would have been like a kid in the front car of a roller coaster, climbing up up UP and then rocketing back down again as stocks rose and fell over that period (and trust me. They DID rise and fall from the pay out of the S & P 500 and protect your downside with U.S. Treasuries, shouldn't you think about doing it?
<>I think the answer is maybe "yes".
*(This has been another short break from the usual 'toon postings. Artists do not live by animation alone...)
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5 comments:
This reminds me a little of Scott Burns' "Couch Potato" portfolio -- half stocks, half bonds. The latest version recommended is one-half Total Stock Market and one-half Treasury Inflation-Protected Securities, which are available in an inexpensive mutual fund called VIPSX and an ETF called TIP.
I have a Roth IRA now that's invested in FFNOX, and I invest the maximum allowed each year. I'm looking into taxable investing on the side, so I'm going to start a Couch Potato Portfolio this year.
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I appreciate the investing advice that you find and pass along to blog visitors. It kick-started my interest in investing earlier this year, and I'm better off for it.
Vanguard has a tax-managed balanced fund that is much the same:
One half larg-cap stocks, one half municipal bonds. And a really low cost: .10%. It's for investment accounts, not retirement. $10,000 minimum investment. Withdrawal penalty.
The biggest part of an investment strategy is the investor's comfort with risk. Having said that, it's important to consider what that 1.25% increase in gains is in relation to. If it's an investment of $100, then an extra $1.25 isn't much. If it's $100,000, then we're talking about an extra $1,500, which I doubt anyone would turn down if it was offered to them.
The nature of your portfolio should also change depending on how close you are to retirement. Holding treasuries earlier on, when presumably you can take more risk due to a longer time horizon, could actually reduce your overall returns by missing out on higher yields in other investments.
Treasuries themselves don't insure you against swings in the market, a diversified approach does. If the treasuries were the magic bullet that protected against loss, then the percentage gain would actually be higher with treasuries in your portfolio. Diversity comes in all flavors, including having diverse holdings in an all-stock portfolio (technology, consumer goods, international companies, etc).
There must be some misstatement in the numbers above.
For $100,000 invested at annual returns of 9.75% and 11.1% the outcomes over the example 36 year period would be roughly $2.8 million and $4.4 million respectively. The lower rate yields only 64% of the higher rate.
There must be some misstatement in the numbers above.
For $100,000 invested at annual returns of 9.75% and 11.1% the outcomes over the example 36 year period would be roughly $2.8 million and $4.4 million respectively. The lower rate yields only 64% of the higher rate.
The mistake here, I think, is the way you restate the original premise.
It's 9.75% and 11.1% over the whole 36 years, not a constant 9.75% and 11.1%, each percentage compounded annually for 36 years.
Sure, annual compounding of each figure would give you a much wider spread, just like you say. But that's not how the percentages work year to year. Sometimes 100% stocks outperforms the 50/50 mix, and sometimes it way underperforms. Depends on the year.
The two percentages are cumulative. That's where the 84% comes from.
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