Crackerjack Greenback Prudent Advice for a Prosperous Future

December 17, 2008

A Closer Look at a Diversified 20% 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 20% Stock portfolio.

       Here’s a pie chart depicting the asset allocation for a diversified 20% Stock portfolio:

Allocation for 20% Stock Portfolio - Small

       Click here to learn how to invest in a diversified 20% Stock portfolio. Keep in mind that you’ll need $188,000 to meet the fund minimums for this particular portfolio. If you invest at Vanguard, the total expense ratio for this portfolio would be 0.20%.

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

Historical Returns for 20% Stock Portfolio - Small

Now for some quick facts about this 20% Stock portfolio:

  • The highest calendar year return for this portfolio was 20.8% in 1933.
  • The lowest calendar year return for this portfolio was -10.5% in 1931.
  • From 1927 to 2007, the average annual return for a diversified 20% Stock portfolio was 6.7%.
  • During any consecutive 3 years from 1927 to 2007, this portfolio lost money 3 times out of a possible 79 periods. In 1 of those 3 times, it lost less than 0.6% of its original value.
  • The two worst 3 year periods were 1929-1931 and 1930-1932 (Great Depression), when the portfolio lost about 12% of its original value.
  • During any consecutive 5 years from 1927 to 2007, this portfolio lost money only once out of a possible 77 periods. Even then, it lost less than 1.8% of its original value.
  • This 20% Stock portfolio never lost money during any consecutive 7 year period from 1927 to 2007.
  • This portfolio never averaged less than a 4.2% annual return during any consecutive 30 year period from 1927 to 2007.

       My hope is that this information will prepare you for the possible risk of investing in a 20% Stock portfolio while giving you some perspective during tough times. I think it’s really important to emphasize that last quick fact. If you have a time horizon of 30+ years, there is no historical period where you would have averaged less than a 4.2% annual return. (Even if you started just before the Great Depression!!!) Take comfort in that fact when the media barrages you with doom and gloom news every day.

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