Crackerjack Greenback Prudent Advice for a Prosperous Future

December 18, 2008

A Closer Look at a Diversified 10% Stock Portfolio

Filed under: Diversified Portfolios,Investing,Retirement Planning — Paul Williams @ Crackerjack Greenback @ 3:30 am

       In my example of what a diversified portfolio looks like, I used a 70% Stock portfolio as an illustration. To save you the time and math, I’ve started a series of posts that look at a range of diversified portfolios from 100% Stock to 0% Stock. I’ll break these portfolios down in 10% increments. Today we’ll take a closer look at a 10% Stock portfolio.

       Here’s a pie chart depicting the asset allocation for a diversified 10% Stock portfolio:

Allocation for 10% Stock Portfolio - Small

       Click here to learn how to invest in a diversified 10% Stock portfolio. Keep in mind that you’ll need $375,000 to meet the fund minimums for this particular portfolio. If you invest at Vanguard, the total expense ratio for this portfolio would be 0.19%.

       Here’s a chart showing the historical returns for this portfolio from 1927-2007:

Historical Returns for 10% Stock Portfolio - Small

Now for some quick facts about this 10% Stock portfolio:

  • The highest calendar year return for this portfolio was 18.6% in 1982.
  • The lowest calendar year return for this portfolio was -5.5% in 1931.
  • From 1927 to 2007, the average annual return for a diversified 10% Stock portfolio was 5.8%.
  • During any consecutive 3 years from 1927 to 2007, this portfolio lost money 2 times out of a possible 79 periods. The two worst 3 year periods were 1929-1931 and 1930-1932 (Great Depression), when the portfolio lost about 2.7% and 0.3% of its original value, respectively.
  • This 10% Stock portfolio never lost money during any consecutive 5 year period from 1927 to 2007.

       I would never recommend that anyone with a long-term time horizon invest in a 10% Stock portfolio. You get a much better return for very little additional risk by using a 20% Stock portfolio instead. That extra 10% of stock really does help to increase your return and long-term results significantly.

       If you have a short-term (< 5 years away) goal that you'd like to save for, I recommend using a high-yield savings account or U.S. Treasury Inflation-Protected Securities (TIPS). These will enable you to save for your goal while earning a reasonable interest rate with little to no risk.

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