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Results of a Balanced Portfolio

For whatever reason, anytime somebody brings up index funds one of the bigger personal finance blogs (like The Simple Dollar or Get Rich Slowly), there tends to be somebody in the comments who says something to the effect of “Index funds failed investors over the last decade.”

I can’t tell you how much this frustrates me given that:

For those who are not aware: “Index Fund” is not synonymous with “S&P 500 Index Fund.” There are index funds that track a whole host of other things, including bonds, commodities, and REITs.

How did a (re)balanced portfolio perform?

Just to set the record straight, I thought I’d take a minute to share the results internationally diversified portfolios, constructed from real index funds over the last decade.

The following portfolios are assumed to have been rebalanced annually on January 1 of each year. The stock portion is assumed to be 30% international (Vanguard’s Total International Stock Index Fund) and 70% U.S. (Vanguard’s Total Stock Market Index Fund). The bond portion is assumed to be Vanguard’s Total Bond Market Index Fund.

From 1999-2008, the following are the annualized rates of return for various asset allocations:

  • 70% bonds, 30% stocks: 4.44%
  • 60% bonds, 40% stocks: 4.02%
  • 50% bonds, 50% stocks: 3.54%
  • 40% bonds, 60% stocks: 3.00%
  • 30% bonds, 70% stocks: 2.39%

[You can see a screen shot of the spreadsheet with all the results here.]

Now, I’ll be the first to admit, those returns are hardly spectacular, and they were almost certainly below investor expectations. But they’re hardly the catastrophic declines in value that some people seem to think occurred.

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Comments

  1. I think the key is the rebalancing. People think buy and hold means that you don’t have to pay attention to the account. I think for some people it’s the same as ‘set it and forget it.’ But it’s not. You need to rebalance your portfolio. Your numbers show that if rebalanced just annually there are positive gains to be had over the last ten years. The numbers would probably be a little better if you rebalanced twice a year or quarterly as well.

  2. It’s good to know that I’m not the only one frustrated by those claims.

    For those that actually “beat the markets” (did better than indexing stocks, bonds, whatever) over the last decade, each dollar that was earned above a market is someone else’s dollar that was lost below that same market over that same period of time.

    Given that active management tends to incur higher costs than indexing, more money was actually lost trying to do better than indexing than was gained over the last decade. Hmmm, that sounds like active management is what failed investors over the last decade, not indexing.

  3. Maybe your list of results should include some kind of average of what most other equity index funds did. It’d be very convincing if some of your index fund examples beat the average. Even better if they beat more than half the other funds or had above median return.

  4. TIE – The indexes Mike used are the averages of active management before active management fees and after the index funds’ fees. So, dollar weighted, they have to be better.

    Rob – passive investing cannot fail worse than active investing because passive is the aggregate of all active investing. Feel free to disagree but this is simple math.

  5. Rob Bennett says:

    The conventional investing wisdom of the past 30 years (The Passive Investing Era) has failed us big time. There’s nothing wrong with indexing. But indexing is now connected in the public mind with Passive Investing because most of those who advocate Indexing also advocate Passive Investing.

    For so long as indexing is generally perceived as being a passive strategy, it is going to be criticized when Passive Investing fails us. This is perfectly natural and appropriate. We should not be surprised by this.

    Rob

  6. I appreciate the statistics you gathered, but the question is: how likely is it that an investor would choose one of those portfolios? I don’t claim to know the answer, but I do know that when the technology bubble was building it would have taken a strong will to have a large percentage of money in bonds.

    Yes, there are those who know that market timing is impossible, yet would still be hard-pressed to have much less than 100% in equities when the markets are rising rapidly.

  7. I meant to write that “Maybe your list of results should include some kind of average of what most other equity MUTUAL (not index) funds did. It’d be very convincing if some of your index fund examples beat the average. Even better if they beat more than half the other funds or had above median return.”

  8. For so long as indexing is generally perceived as being a passive strategy, it is going to be criticized when Passive Investing fails us.
    Then it’s fortunate that the returns for Mike’s relatively simple examples of diversified portfolios and the returns for a more complex diversified portfolio, the Coffeehouse Portfolio, clearly show that a diversified passive investing strategy hasn’t failed us. But do feel free to criticize, Rob. Most everyone is aware by now that the only investment strategy you find worthy is one that includes your method of timing the S&P 500.

  9. Rob – It’s the same math. If you sell some of your equity position (index or single stock) for whatever reason, someone else has to be on the other side of your transaction, same market. We can’t all lower our stock allocation as a market. Your next statement, that “there is no way that the math can work out for sticking with the same stock allocation at all price levels,” further demonstrates your complete lack of understanding of math.

    I am explaining the faults in your logic for the benefit of other readers, not in hopes of trying to illustrate a point for you, which I have long ago concluded is a lost cause. That said, I don’t plan to further engage you any more debate over your market timing scheme and encourage others to do the same.

  10. Rob Bennett says:

    passive investing cannot fail worse than active investing because passive is the aggregate of all active investing. Feel free to disagree but this is simple math.

    It depends on what sort of “active investing” you’re talking about, Dylan. If by “active investing,” you mean picking individual stocks, you are right. If by “active investing.” you mean lowering your stock allocation at times of insanely high prices, the simple math cuts the other way. There is no way that the math can work out for sticking with the same stock allocation at all price levels. Stocks are not able to provide a good long-term return when purchased at insanely high prices.

    Rob

  11. Rob Bennett says:

    But do feel free to criticize, Rob.

    Thanks for saying that, Carlyle. I hope that all understand that the purpose of my criticism is to help, not to hurt anyone’s feelings.

    Most everyone is aware by now that the only investment strategy you find worthy is one that includes your method of timing the S&P 500.

    I have put forward some ideas as to the long-term timing strategies that make the most sense to me. My hope is that there will come a day when there are millions of middle-class investors (and many “experts” too!) sharing their ideas on how best to engage in long-term timing. I already know what I think. I learn myself only when others put forward their takes.

    Rob

  12. That is amazing. Bonds, which I have always thought of as pretty much worthless for their lack of growth, actually outperform stocks.

  13. @SEO David — You should see the performance of US Treasuries and the UK equivalent (Gilts) over the past 20 years — they’ve beaten equities, despite the roaring 1990s in between, and their puny yields.

    I’d suggest it’s bullish for stocks though, rather than a strong case for loading up more on bonds!

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