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. Last week’s post was about a 100% Stock portfolio, and today’s post is about a 90% Stock portfolio.

Here’s a pie chart depicting the asset allocation for a diversified 90% Stock portfolio:

**Click here to learn how to invest in a diversified 90% Stock portfolio**. Keep in mind that you’ll need $60,000 to meet the fund minimums for this particular portfolio. If you invest at Vanguard, the total expense ratio for this portfolio would be 0.26%.

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

Now for some quick facts about this 90% Stock portfolio:

- The highest calendar year return for this portfolio was 75.5% in 1933.
- The lowest calendar year return for this portfolio was -45.3% in 1931.
- From 1927 to 2007, the average annual return for a diversified 90% Stock portfolio was 11.0%.
- During any consecutive 3 years from 1927 to 2007, this portfolio lost money 10 times out of a possible 79 periods. In 2 of those 10 times, it lost less than 1.5% of its original value.
- The two worst 3 year periods were 1929-1931 and 1930-1932 (Great Depression), when the portfolio lost about two-thirds of its original value.
- During any consecutive 5 years from 1927 to 2007, this portfolio lost money 5 times out of a possible 77 periods.
- During any consecutive 7 years from 1927 to 2007, this portfolio lost money only 3 times out of a possible 77 periods. All three of these 7 year losing periods were during the Great Depression.
- This portfolio averaged double digit annual returns (10% or more) for 52 of a possible 67 consecutive 15 year periods from 1927 to 2007.
- This 90% Stock portfolio
**never lost money**during any consecutive 15 year period from 1927 to 2007. - This portfolio
**never averaged less than an 8.3% annual return**during any consecutive 30 year period from 1927 to 2007. - In 45 of the 52 possible consecutive 30 year periods from 1927 to 2007, this portfolio had an average annual return
**equal to or higher than**its historical average of 11.0%. Nearly 85% 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 90% 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 an 8.3% annual return. (Even if you started just before the Great Depression!!!) And nearly 85% 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.

If you think your time horizon is shorter because you’re close to or in retirement, consider this: if you are 60 years old and your life expectancy is 90, you have 30 years left. The time horizon for your retirement portfolio is 30 years! That’s why there’s such a wide range of possible portfolios for a successful retirement (see this post about what asset allocation you should use in retirement).

Finally, if you think a 90% Stock portfolio is much safer than a 100% Stock portfolio, you should realize that the 10% in Bonds only reduces your risk slightly. Historically speaking, the standard deviation (a measure of risk) for a 100% Stock portfolio is 23.3%. The 90% Stock portfolio has a standard deviation of 21.0%—not much difference.

If the small decrease in volatility (how wildly the value of the portfolio moves) really makes you feel better, then go ahead and invest in the 90% Stock portfolio. But realize that it’s not much safer than the 100% Stock portfolio, and you’ll be giving up an additional 0.4% return (historically). That might not sound like much, but it could mean having 11.4% less after 30 years. (After 30 years, an investment of $1,000 would grow to $25,500 in a 100% Stock portfolio but only $22,890 in a 90% Stock portfolio. This is based on historical averages which do not represent guaranteed future returns.)

Are you going to share what your portfolio looks like? Always interested to see how people allocate…

Comment by hank — December 8, 2008 @ 8:14 pm

Hank:

Yes, in a future post. I want to get the analysis on these portfolios finished first, then I can talk about some of the problems. (Like the minimum investments and such.)

Comment by Paul Williams @ Crackerjack Greenback — December 8, 2008 @ 10:52 pm