What Can a 60/40 Portfolio Deliver?
Posted on: April 4, 2016
The 60/40 portfolio, one that consists of 60% equity and 40% bond, is very common. Most of my clients use a variation of this portfolio. Because of this, I want to understand how this portfolio performed in the past.
For this study, I use the S&P 500 for the equity portion and the 10 year treasury bond for the bond portion. The market data I use is from 1928 to 2015. Note that this period includes the Great Depression.
The portfolio is rebalanced every year to maintain the 60/40 allocation. Then I examine five return intervals: 1 year, 2 years, 5 years, 10 years and 20 years. For each return interval, I calculate the average return, best return and worst return.
| Interval | 1 year | 2 years | 5 years | 10 years | 20 years |
| Average | 8.55 | 8.55 | 8.55 | 8.55 | 8.55 |
| Best | 32.85 | 25.75 | 20.15 | 16.04 | 14.78 |
| Worst | -27.55 | -20.6 | -5.37 | 1.8 | 3.48 |
- The 60/40 portfolio can still be quite risky in the short term. Note that the worst returns for the 1 year and 2 year intervals are -27.55% and -20.6% respectively. These are steep losses nobody likes. Read the rest of this entry »
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Recently a client asked me why we bother with investing in international markets. After all, the S&P 500 has done quite well in the last year. Indeed, it has outperformed foreign markets three years in a row, and by a huge margin to boot. Take 2014 for example-the S&P 500 was up 13%, while the international markets on aggregate were down 5%.
So why then? Well, let’s look at this table …
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Recently, I did a long horizon return study based on 100 years of stock market data and inflation from 1916 to 2015.
The study assumes a 20-year investment horizon. If your primary reason for investment is for retirement security, this is the horizon that should apply.
In the study, I looked at rolling 20-year stock returns, inflations and (after inflation) real stock returns. I present the results in the table below. The first and second columns are the beginning and ending years of the 20- year period. The third column shows the nominal growth of $1 invested in S&P 500 in the corresponding period. The fourth column shows the shrinkage of $1 due to inflation in the corresponding period. The fifth column shows the real (after inflation) growth of $1 invested in S&P 500.
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During the last 100 years, inflation (cash is losing value) is the norm, while deflation (cash is getting more valuable) only occurs during the Great Depression.
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In the 20-year span that has the worst inflation (between 1968 and 1987,) cash loses 71% of its value.In the medium case, cash loses 45% of its value in 20 years.
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During the last 100 years, stocks always make money in any given 20-year period. Even in the worst 20 years (between 1929 and 1948) which includes the Great Depression, you get $1.95 for $1 invested in stocks. (If you use my dividend strategy, you could do a lot better.)
- In the medium scenario, stocks give you 4 times real return; In the best scenario, stocks give you 10 times real ret Read the rest of this entry »
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It seems every other d
ay or so, another shoe drops in China that sends the world market into tailspin. What the heck is going on there?
In 2008, the US was hit by the worst financial crisis since the Great Depression. Between 2008 and 2013, US industrial production contracted about 5%, Japan and Europe did even worse, they were down more than 10%. But China’s industrial production more than doubled during those five years. By 2013, it was 30% larger than that of the US.
What give? Alas there was a stimulus package in China (with borrowed and printed money) to build high speed rails, airports, metros, ports, and more than a few ghost towns. This infrastructure building binge created a massive but artificial demand, while growing government debt to 280% of GDP.
For a time, it was almost magical. China was growing by 10% while other countries were in recession and China was credited with saving the world economy.
But this growth model is not sustainable: there are only so many ghost towns you can build before running out of ghosts. So starting about 3 years ago, China scrambled to find a new growth model that is based on domestic consumer demand (as opposed to export,) services (as opposed to manufacturing,) innovations and entrepreneurship (as opposed to government command and control.) Read the rest of this entry »
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Investors Gone Crazy
Posted on: January 11, 2016
Here is the culprit of the global market selloff in the first week of 2016: The CSRC (China Securities Regulatory Commission) instituted a stock market circuit breaker in the new year: a 15 minute trading pause after a 5% drop in the main index, and the market closes for the day after a 7% drop.
The purpose of the circuit breaker was to temper the crazy volatility in the Chinese market. Talking about unintended consequence, it achieved the exact opposite effect. Retail investors there, fearful they couldn’t sell their shares fast enough, rushed for the exit, driving the main index down 7% (thereby triggering the circuit breaker) for 2 out of the first 4 trading days of the new year.
The CSRC did a quick about face and suspended the circuit breaker, basically telling investors now you could sell to your hearts’ content. You know what? The selling stopped, and the market came back about 2%.
This just shows how crazy and irrational Chinese investors can be. A circuit breaker should have no value impact on stocks whatsoever, and yet they brought their stocks down more than 17%. Read the rest of this entry »
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In the last two days I have been doing tax loss harvesting for my clients.
According to Google,
Tax loss harvesting is the practice of selling a security that has experienced a loss. By realizing, or “harvesting” a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining the optimal asset allocation and expected returns.
That sounds simple enough, but actually I learned a few things doing tax loss harvest. 1) You can make money and still claim a tax loss. 2) The difference between TTM Yield vs 30 Day SEC Yield and how to use them to select a bond fund.
Take one high net worth client for example, he has about $500k of DWFIX, an international bond fund. I sold that to realize a $31k loss that he can use for tax deductions. But during the three years that the position was in his portfolio, it generated more than $100k in incomes. So he makes money in this position but still gets to claim a tax loss. How nice!
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Stocks Decline 14% (June 1950 to July 1950) North Korean troops attack along the South Korean border. The U.N. Security Council condemns North Korea. The U.S. gets involved. - Stocks Decline 20.7%, (July 1957 to October 1957) The Suez Canal crisis manifests itself, the Soviets launch Sputnik and the U.S. slips into recession.
- Stocks Decline 26.4% (January 1962 to June 1962) Stocks plunge after a decade of solid economic growth and market boom, the first “bubble” environment since 1929.
- Stocks Decline 22.2% (February 1966 to October 1966) The Vietnam War and Great Society social programs push government spending up 45% in five years. Inflation takes off.
- Stocks Decline 36.1 % (November 1968 to May 1970) Inflation really starts to pick up, hitting 6.2% in 1969 up from an average of 1.6% over the previous eight years. Vietnam War escalates. Interest rates surge; 10-year Treasury rates rise from 4.7% to nearly 8%.
- Stocks Decline 48% (April 1973 to October 1974) Inflation breaks double-digits for the first time in three decades. There is the start of a deep recession; unemployment hits 9%.
- Stocks Decline 19.4% (September 1976 to March 1978) The economy stagnates. High inflation. Adjusted for inflation, corporate profits haven’t grown for eight years.
- Stocks Decline 17.1% (February 1980 to March 1980) Interest rates approach 20%, the Read the rest of this entry »
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Quarterly Market Review
Posted on: November 18, 2015
As a recap of interesting developments in 2015-Q3 we offer the downloadable link below.
- Equities – US, International, Emerging and REIT Markets were down
- Fixed Income – US and Global Markets were up
- The ‘Best’ Stock Market was Ireland at -1.12%
- The ‘Worst’ Stock Market was Brazil at -33.06%
- Commodities were universally weak with Crude Oil turning in the worst performance at -27.39%
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[by Russ Thornton] When sharing the initial results of my survey last week, there was a high level of interest in the topic of Social Security.
And here we are, just a week later, with a couple of significant Social Security changes included in Section 831 of the recent budget approved by the House and expected to be approved by the Senate.
These are changes that could cost some of you tens of thousands of dollars in lifetime Social Security benefits.
First, a little history . . .
Back in 2000, a law was passed that included a provision allowing you to apply for Social Security benefits and then voluntarily suspend those same benefits. While adding to the already complex choices involved with Social Security benefit elections, this law unintentionally allowed some couples to “double dip” from their Social Security benefits. Read the rest of this entry »
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For those who are hard core about learning personal finance, I have this to share with you – Jim Ludwick’s Tweets for the Month. Jim is a hourly fee-only financial planner I respect a lot. His tweets cover a wide range of issues
- Is Wall Street Eating Your 401k Nest Egg?: PBS story: https://t.co/bpRIQVm8Um@asergunina #GarrettMember @SemperFrugalis8:34AM
- Is this a better way to manage your cash? Give a look to this new strategy:https://t.co/kh0t33E0RG @sergunina #GarrettMember4:11AM
- RT @SquaredAwayBC: Gulp. Average costs for dementia care $287,038- far exceeding cancer, study finds https://t.co/B0hmvCbN733:59AM
- Why you should file the college aid FAFSA no matter how rich you are:https://t.co/DVECFK2ceh @asergunina #GarrettMember3:58AM
- 7 scams that might affect you: https://t.co/biOGBqLSzK3:51AM
- RT @ASergunina: RT @Forbes: If your employer offers a Roth 401(k), consider it, especially if you’re on the younger side: https://t.co/pxTt…3:48AM
- Advantages of working with a remote financial advisor. My latest blog:http://t.co/v6GHi7od4i #GarrettMember @ASergunina @SemperFrugalis6:51AM
- @united typical: canx; 14 hrs later delayed; arrive early sit on tarmac; now late; connect Read the rest of this entry »
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When Accident Happens …
Posted on: October 13, 2015
A few months ago, a senior client of mine slipped and fell in his basement. He broke his hip and couldn’t get up to call help. He was only found lying in the basement by his tenant two days later.
His life was saved, but he is permanently wheelchair bound and he will need nursing care that costs over $150k per year. This expense alone will run down his personal wealth in a matter of a few years.
As his financial advisor, what could I have done for him?
Three years ago when he was just retired from work, he approached me for retirement planning. Upon hearing that he was living by himself and his children were far way, I was adamantthat he bought long-term care insurance. It was costly, over $500 per month in premium. He was very reluctant to “waste” money on insurance, but I was adamant.
For seniors, a major cause for the need of long-term care is slip and fall at home. I was even trying to talk him into selling his townhouse that has two flights of stairs. That was a long shot, but about buying long-term care insurance, I just would not relent. Read the rest of this entry »
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For those who are hard core about learning personal finance, I have this to share with you – Jim Ludwick’s Tweets for the Month. Jim is a hourly fee-only financial planner I respect a lot. His tweets cover a wide range of issues…
- Calculate your life insurance needs (capital analysis) on this website:http://t.co/FepufsO9wf #GarrettM
ember @ASergunina @TheEdsonMiller8:09AM - Rating the rater: @Ritholtz writes about Morningstar’s 401k company options and how they could do better: http://t.co/ZrKxZBSZDY @ASergunina3:39PM
- NFL player makes millions, lives on $60,000 a year RT @MarketWatchPF:http://t.co/X6ld4FF7fr @ASergunina @TheEdsonMiller @LauraScharr4:47PM
- Most popular tweet this year? Tennant screening guide for landlords fromhttp://t.co/R0e8aiZGoH: http://t.co/jmq4ELCJiK @YuriSergunin4:35PM
- Equity Indexed Annuities or Fixed Index Annuities earn regulator alert:https://t.co/rT3GviYndA @ASergunina @TheEdsonMiller5:04AM Read the rest of this entry »
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Long-Term Care Costs
Posted on: September 30, 2015
[by Russ Thornton] At some point, 70% of people over the age of 65 will need some form of long-term care and support.
I get a lot of questions from clients about long-term care insurance.
Yet, I find many people are more willing to discuss their estate planning (and their mortality) than the possibility of finding themselves in a situation calling for long-term care.
Typical objections to insurance for long-term care include:
- It’s too expensive,
- My kids/spouse/family will take care of me,
- I’ll pay for it myself out of my savings and investments,
- or something else.
And let me mention the fact that I don’t sell long-term care or any other type of insurance, so I’m not sharing this information to motivate you to buy something from me.
In fact, long-term care insurance isn’t necessary for many, despite many insurance companies’ and agents’ best attempts to use fear-based tactics to sell you policies. Read the rest of this entry »
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As of today, all three market indices Dow Jones, Nasdaq and the S&P 500 are in correction territory, meaning they’ve all fallen more than 10%. Last time this happened was in 2011. Then I wrote an article “How Often Does Market Correction Happen?” to calm the nerve of my clients and readers.
The key insight from that article is this. A 10% correction happened every other year in history, so you shouldn’t be surprised by it, nor should you be panic. In particular, this 10% correction is kinda over-due since that last one was 4 years ago.
In addition, don’t be surprised by a 20% correction over the next month and a half. The last time we had a 20% correction was in 2009. That was 6 years ago. In history, a 20% correction happened every other five years, give and take.
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Two days ago, Greek voters said “No” to the term of EU bailout in a national referendum. Yesterday, the Shanghai Stock Index fell another 5.9%. Cumulatively, the index has fallen 30+% since reaching its peak in June 12. Which of these two events will likely be the black swan that rocks the US market.
I don’t think it will be Greece. The Greek economy is a mere 1.7% of the total EU. It’s basically a rounding error. When the first act of this Greek drama was played in 2011, the US market promptly dropped 19%. That was a wealth destruction ten times the size of the entire Greek economy. This just shows the fear of a disaster can be much worse than than disaster itself. Now that we are in the third act of this Greek drama, global markets are more or less immune to it.
China is an entirely different matter, and it has a potential to become a black swan … Read the rest of this entry »
The Investment Scientist 