Crackerjack Greenback Prudent Advice for a Prosperous Future

December 15, 2008

A Closer Look at a Diversified 40% 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 40% Stock portfolio.

       Here’s a pie chart depicting the asset allocation for a diversified 40% Stock portfolio:

Allocation for 40% Stock Portfolio - Small

       Click here to learn how to invest in a diversified 40% Stock portfolio. Keep in mind that you’ll need $94,000 to meet the fund minimums for this particular portfolio. If you invest at Vanguard, the total expense ratio for this portfolio would be 0.22%.

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

Historical Returns for 40% Stock Portfolio - Small

Now for some quick facts about this 40% Stock portfolio:

  • The highest calendar year return for this portfolio was 36.4% in 1933.
  • The lowest calendar year return for this portfolio was -20.5% in 1931.
  • From 1927 to 2007, the average annual return for a diversified 40% Stock portfolio was 8.2%.
  • During any consecutive 3 years from 1927 to 2007, this portfolio lost money 5 times out of a possible 79 periods. In 2 of those 5 times, it lost less than 4.2% of its original value.
  • The two worst 3 year periods were 1929-1931 and 1930-1932 (Great Depression), when the portfolio lost about 30% of its original value.
  • During any consecutive 5 years from 1927 to 2007, this portfolio lost money 4 times out of a possible 77 periods.
  • This 40% Stock portfolio never lost money during any consecutive 7 year period from 1927 to 2007.
  • This portfolio never averaged less than a 5.9% annual return during any consecutive 30 year period from 1927 to 2007.
  • In 29 of the 52 possible consecutive 30 year periods from 1927 to 2007, this portfolio had a return higher than its historical average of 8.2%. Over 55% of the time, you would have had a higher than average return for a 30 year time period.

       My hope is that this information will prepare you for the possible risk of investing in a 40% Stock portfolio while giving you some perspective during tough times. I think it’s really important to emphasize those last two quick facts. If you have a time horizon of 30+ years, there is no historical period where you would have averaged less than a 5.9% annual return. (Even if you started just before the Great Depression!!!) And 55% of the time, you would have had a higher than average return over a 30 year time period. Take comfort in those facts when the media barrages you with doom and gloom news every day.

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