Is This a Good Time to Invest in Stocks?

The headlines blare "Market at 5 Year High."  Graphics on CNBC and Bloomberg Television track points required to get Dow Jones to an all-time high.  Giddiness abounds.  All of this in the face of D.C. craziness, European nuttiness, and economic weakness domestically and globally that could reasonably be expected to slam markets to the mat and get a 3 count.

Individuals as well as professionals built up cash balances, missed the push higher, and returns suffered.  And we know what cash is earning these days.

So, not surprisingly, advisors get the question more frequently these days of whether now is a good time to get into the market.

The people asking the question remind me of people at a swimming pool.  There, you find some people dive right in and others will gingerly walk down the steps at the low end, proclaim "ooh, it's cold," back off, go back in, etc., and take 30 minutes to get in up to their waist.  Each has to be treated differently.

Joe and Suzy Wannabinvested

Take Joe and Suzy Wannabinvested--a couple in their mid-40s.  The first thing I emphasize, and I try to pause dramatically in doing so, is that what they care about is where the market is 25 - 30 years from now--NOT WHERE IT IS GOING OVER THE SHORTER TERM!

Some Joe and Suzy Wannabinvesteds seem to think I am a psychic.  They want me to pull out a crystal ball and say "ooh, look at this, the market will be a lot lower 6 months from now. That's when you should get in."

Sorry, can't do that!

So what can I do to get people started?  First of all, we talk about asset allocation.  Joe and Suzy need a model that specifies percentage to be invested in stocks (big cap, small cap, international, etc.) and bonds and cash.  That's the goal. 

Secondly, we need to find a way to comfortably get to that model.  I suggest all in* (especially if they are making regular contributions via a 401(k) and they are not close to drawing on the funds); but if Joe and Suzy are more comfortable going piecemeal, that is better than doing nothing.  I have in mind a man from several months ago who desperately wanted to get into stocks but couldn't pull the trigger.  I pleaded with him to start by just putting one third of his targeted allocation in - to just stick his big toe into the water.

Alas, the news was just so bad; and he was absolutely sure that a better entry point was down the road. As far as I know, he never got in.  I do know that a better entry point never materialized.

In the course of our discussion, he made an interesting comment.  He said, "I couldn't stand it if my portfolio was down $6,000 over the next month."  This elicits a couple of important points:  (1) You haven't made anything or lost anything until you draw funds from your account or realize gains or losses, (2) possibly this man shouldn't invest in stocks at all.  Point (1) is true on the upside as well as the downside.  Take the case of Apple, as an example.  Think of all the braggarts proclaiming how much they made when the stock was at $700.  Point (2) recognizes that investing can be an uncomfortable undertaking as, for example, flying can be.  There are some people who should do neither.

*There is a difference between setting a record price and a record valuation metric.  In particular, if the headline one day becomes "S&P 500 P/E ratio at all-time high," I will definitely trim back and be more cautious.

The Market Pundits are Different From You and Me

Where's the humble gene?

The pundits are different from you and me.  Some of you recall that James K. Glassman wrote a book in 1999, along with Kevin A. Hassett entitled Dow 36,000.  In the book, they talked about how stocks were not as risky as bonds in that, over long periods, stocks always outperform.  Their metrics revealed that, in 1999, market valuation was far from reflecting this fundamental fact.  They said,

"...the single most important fact about stocks at the dawn of the twenty-first century: They are cheap....If you are worried about missing the market's big move upward, you will discover that it is not too late. Stocks are now in the midst of a one-time-only rise to much higher ground–to the neighborhood of 36,000 on the Dow Jones industrial average."

The Dow peaked at 11,750 and subsequently headed to 7,286 on the back of two bubbles bursting.

Financial advisors today still see the train wreck resulting from buying into forecasts along these lines. Clients come in and say that they want to get into the market but are shy because the last time around their retirement funds were decimated by acting on Glassman's et al. views.

Where's Glassman today, you may ask?  You may think he has waddled off into the weeds with his tail between his legs.  You would be wrong.  Actually, he writes a column for Kiplinger (a magazine I subscribe to and recommend for its excellent educational articles) dispensing investment advice each month.

How are pundits different from you and me?  They totally skipped the humble gene.

This isn't a recent development.  It has been reported that the medicine man in American Indian tribes would give "good medicine" via chants to the warriors before they went into battle.  The "good medicine" would ward off soldier bullets, it was said.  I don't recall ever having read about the shaman being run out of the village after the dead were counted.

All of this is brought to mind with a pronouncement this week by market guru Dennis Gartman, a man who cannot be accused of mincing words.

He said the end of the bull market run was here,

"The game board has been flipped over; the game has changed... change with it or perish. We cannot be more blunt than that."

Who knows - the market may go up or may go down.  Anyone have a coin?  A useful exercise in the classroom is to begin by asking students for a strongly held belief.  Some will say, for example, that "I was raised by my parents."  Then, follow up with asking what evidence would it take to  convince them that they were wrong.  In this way, students learn critical thinking by examining their beliefs and the underlying evidence.

In the same vein, it would be worthwhile, I think, to ask market pundits, such as Gartman, what it would take to admit that he was wrong.  Suppose the market is up 15 percent 6 months from now. Would that do it?

In any event, if he is wrong, he likely will follow fellow pundits and not be deterred from making equally bold forecasts in the future.  Furthermore, if he is right - suppose the market does take a big downturn - he will likely write a book and make all the talk shows.

There is a subtle moral hazard issue, as Glassman so aptly demonstrates.

Helaine Olen and Ben Carson: The Extremes

Well, I found myself at both ends of the spectrum this week.  Reading Helaine Olen's Pound Foolish (#7 on Amazon's Business Books bestseller list) pushed me all the way to the far left, where it pounded away at the idea that financial planning couldn't possibly help the middle class attain a decent retirement what with the fact the national economy is pushing the middle class ever lower.  The government has to come to the rescue.

She beat up big time on some of the nation's top financial promoters, including Orman, Ramsey, Bach, Cramer, and especially Kiyosaki. She takes on the financial literacy movement and spends a lot of time on the idea that people, and especially women, can't prosper because their income is anemic and they have life events that disrupt any effort at securing a desirable financial future.

Then, as far right as you can possibly get, was the talk by world-renowned Hopkins pediatric surgeon Dr. Ben Carson at the National Prayer breakfast with President Obama present.



Republicans seized on this speech as a lecturing of the President.  I really missed that part of it--although granted, the President did look bored.  In terms of the lecturing, do people really believe that Obama doesn't know the deficit is big and the national debt is humongous?  Do people believe that he hasn't heard a proportional tax proposal a zillion times or the idea for a medical card at birth?  The right jumped on the speech as a springboard for a run at the Presidency.

Dr. Carson is an interesting, accomplished man.  He grew up in poverty, supported by a single mother who worked multiple jobs as a domestic and severely limited her two sons watching TV.  She required her sons to read books and write book reports which she somehow corrected without being able to read herself.

So there you go.  Just take personal responsibility, and some of the nation's biggest problems are solved.  Imagine what can be done with the 26% unemployment rate among teenagers, many of whom are in the inner cities, and high school dropouts if we can get their mothers to force them to read a book/week and write a book report.  In fact, I've got a better one:  suppose we can get the unemployed to work on doing a flying dunk from the foul line so that they can take Michael Jordan's route?

Dr. Carson says he will run for President if God asks him.  I know I'm stepping on toes, but that alone makes me nervous.  As I understand it, God told the terrorists on 9/11 to drive planes into the twin towers.  In fact, it was the very same God.  I believe there is a reason for separation of church and state.

For what it's worth, many make it from the middle class to the 1% high income class.  They work really, really hard to get there, Ms. Olen.  You can do it in this country.  I'm not saying it is easy.  And, Dr. Carson, they get help.  They use the G.I. Bill and get grants.  Lower proportional tax rates enable them to buy books for school and keep their car on the road.

The bottom line is Ms. Olen is an excuse-maker supreme and Dr. Carson is a personal responsibility advocate who accepts no excuse.  IMHO, the best path is between the extremes.

How to Execute an Online Trade

Source: Capital Pixel

I  have been working with several young people (late 20s - mid 30s) recently on starting an investment program.  Once they have bought into the well-diversified, low-cost index approach as espoused by Bogle, Malkiel, Buffett, Solin, Hallam, et al., many are ready to take the next step towards doing it themselves.

If their situation is at all complicated, I suggest that I set it up by managing it for the first 3 to 6 months.  That way I can work on getting their investments located efficiently for tax purposes, take account of capital gains and possible load funds they may have, and even be careful if they have company stock to rollover.

Others cases are pretty basic.  For example, they may have $100,000 in a money market fund outside of their 401(k) to invest. They just need some guidance on how to execute a trade to invest in the appropriate ETFs. 

 Executing a Trade

So this is where we are:  they have an asset allocation they are comfortable with and one which they will stick with through the inevitable ups and downs of the market.  They understand that what is important to them is where the market is 30 - 35 years from now, not the short-term ups and downs. They understand there are many ways to invest including market timing, stock picking, fundamental and technical analysis.  They have chosen to invest in low-cost, well-diversified index exchange traded funds.  They understand they are investing in the economy (both domestic and global) and not making bets on individual companies.

So let's say the asset allocation calls for 35% in large cap equity.  Large cap equity stocks are the biggest companies in the economy - companies like Exxon, IBM, etc.  Let's assume further we are using Schwab as our discount broker.  The large cap equity Schwab ETF (zero commission and low expense ratio) has the ticker symbol SCHX.

To start, click on the "Trade" tab (duh!):

Source: Schwab

 (Note the various links such as "History,"  "Balances," etc.  The newbie should click each of these and putter around on the site.  You'll be pleasantly surprised to see the information available to you.




This brings us to:

Source: Schwab

I put in the ticker symbol "SCHX," selected "Buy" from the "Action" drop-down list, entered the number of shares (300), and selected the "Order Type."  

Look at the white box at the bottom.  It shows you the bid-ask price (what people are willing to pay for  SCHX and what people are willing to sell SCHX for).

The box also shows the volume of shares traded.  I suggest, if you have a large number of shares to buy or sell, that you do it in stages, especially if volume is relatively low.  For example, assume the asset allocation model targets 35% of assets invested in the large cap equity sector.  35% of $100,000 equals $35,000 to invest in SCHX, which equals approximately 900 shares.  I would do the trade in increments of 300 shares.

With light volume, executing a relatively large order can move the market.  For the same reason, I tend not to put in orders at the beginning of the day - I prefer to let the market establish a price.  Sometimes at the open, the price will get jerked around by a news event.

When the bid-ask price is close together, I typically put the trade in at the market and usually get the ask price.  If there is a spread, for example 35.00 bid, 35.06 ask,  I will put the trade in at a limit price (you'll see this option in the drop-down list for "order type") at, say, 35.02.  A limit order simply says you are willing to buy the shares only at a particular price or lower.  I suggest when you put in a limit order to put it in for the day rather than leave it open.

At this point, nothing has been done.  You need to click "Review Order."  After you review the order and determine that it is what you want to do, just click "Submit Order."

Do this a couple of times, and you'll quickly see how easy it is.  As you go through the process, you'll  notice various helpful links and information.  For example, on the righthand side of the pages we looked at and described, you'll see a box showing available investable balances.  If you try to buy more than available balances, you'll get an error message.  There are also links to calculators to help you calculate number of shares, etc.

In any of the quote boxes, you'll find that putting in "sch" will produce a list of Schwab ETFs - very useful, for example, if you want a quote on the international ETF but can't remember the symbol.

The bottom line is that learning to manage your own account or even part of your assets can save between 1 and 2% of assets.  Over the long term, this will amount to a significant amount of your nest egg. 

Disclosure:  This information is educational purposes.  Individuals should do their own research or consult a professional before making investment decisions.  I and my clients own some of the ETFs mentioned above.  Also, I am not affiliated and receive no compensation from Charles Schwab.

Monitoring the Bond Market

Source: Capital Pixel

Mention the word "bubble" today and most investment market observers will immediately bring up the bond market.  Bond yields are at historical lows, and Central Banks are printing money at a rapid clip.  Most observers agree that rates are headed higher and that the average investor, who has enjoyed double digit returns as yields have dropped, doesn't really understand the impact of rising rates and falling bond prices.

Bloomberg offers a neat, easy way to monitor bond market performance on an ongoing basis.  Go to the corporate bond link at the Bloomberg site.  There, on the left hand side, you'll find:

Source: Bloomberg

CLICK IMAGE TO ENLARGE Here we have total return performance for both the investment grade and high yield (i.e. junk) bond markets.  As shown, investment grade bonds have produced a negative total return year-to-date of -.63% and the high yield bond sector has returned a positive +.88%.

For those interested in what is being measured, the site defines the indexes as follows:

The FlNRA/Bloomberg Active U.S. Corporate Bond Indexes are comprised of the "active" (most frequently traded) fixed coupon bonds represented by FINRA TRACE. FINRA's transaction reporting facility that disseminates all over-the-counter secondary market transactions in these public bonds. Indexes are updated after 5:30PM ET each business day. The indexes are rebalanced on a monthly basis.

Further down the page at the site are statistics on number of bonds tracked, etc.


Hopefully this Bloomberg table will help some investors avoid statement shock in the event that yields do rise sharply.

$300,000 Party?

Please, please, please

Here we go again.  This time it's Vince Young, former NFL quarterback.  $26 million, 2006, guaranteed.  Today, Ronnie Peoples, who is involved in this fiasco, characterizes Vince Young's financial situation: "not good."  It is said he took out a high-interest loan to throw himself a $300,000 birthday party.

Please, please, please (listen to Mr. James Brown) ... someone give them or someone around them who is responsible my name and number.  I have none of these big name athletes for clients, but I can tell you I will call them stupid to their face at the very mention of funding posses, throwing $300,000 parties, buying a $176,000 Ferrari, or having to take out a high-interest loan.  Part of the sad part of this is that Vince Young (as far as I can tell) is one of the good guys!

Still, I have no problem calling them ignorant if they don't put at least half their earnings away in safe investments.  Help me out here - if you can't live large on $13 million, you've got a problem.  I will use the behavioral finance procedure of aging their picture so they can be introduced to their future self.  I will go with them to the local warehouse or construction site and talk to people who work for 40 years to make less than one 10th of what they make for signing a contract.  If they don't like it, they can fire me - I don't care.  But I won't treat them with kid gloves.

My clients don't really have a choice.  They quickly realize they need to play their cards smart to have a shot at a decent retirement.  Even then, life events can pop up that upset the proverbial apple cart. But here we have athletes and movie stars et al. blessed with a talent and lucky enough to be born in a society that values that talent, to an outrageous extent, and they throw it all away.

You would think that, since most of them went to college, they could read and understand what has befallen those in similar circumstances who have come before.

A Load Fund Saga

Nickel -and-Dimeing Away
Nickel-and-Dimeing Away
Load Mutual Funds  Keep Nickel-and-Dimeing Away 
(To the tune of Slip Sliding Away by Paul Simon)

You can't let your guard down.  That's today's lesson.

I've been working on an account, selling class "C" shares of funds after they become long-term, held for more than 1 year.  Why wait? Because then the 1% back load is supposed to go away.

On Schwab, this is pretty easy.  You go to "Positions" and then "Unrealized Gain/Loss" and click dollar amount at "Cost Basis" for the security of interest and get: CLICK TO ENLARGE

Pretty easy right?  Then you add up the "Long Term" position and sell.  Here you would sell 708.656 shares of the fund (706.785 + .429 + 1.442).

Pretty straightforward right?  Actually it isn't.  The fund here is a PIMCO fund, and they charged a redemption fee on the sale - a bit over $80.  It has since been reversed and the money put back in the client's account.

How did it get reversed?  Schwab was contacted and told there should be no fee.  They asked for information on when the security was purchased.  I pointed out that they were given this info when the account opened - otherwise I wouldn't be able to read the info in the table above online.  They came back with some mumbo jumbo about average cost, etc.

You probably know that, when you do your taxes, you can choose FIFO, LIFO or average cost.
Here it's different - at least that's what I told them; but, truthfully, how can you ever know with all of the fine print and legalese attached to every transaction.  I do know what "C" shares are, though.

So, I held the high ground and insisted that the load goes away after 12 months and that the securities had been held for longer than 12 months - THERE SHOULD BE NO REDEMPTION FEE.

They then contacted PIMCO and gave them purchase date information.

PIMCO then returned the redemption fee back into the client's account.  But, I wonder how often this fee is assessed and slips right by an unsuspecting investor?  Secondly, why can't something as simple as this be done right?

IMHO, the load mutual fund industry is killing itself and I, for one, will

...watch while you're lowered
Down to your deathbed
And I'll stand over your grave
'Til I'm sure that you're dead. (Dylan - "Masters of War" - covered by Pearl Jam)
 

Book Review: Street Smarts (Jim Rogers)

Take a self-made rich guy with strong views who has traveled the world and you've got a unique, interesting take on where things are headed.  A lot of people will tell you they've traveled the world. Most have been in and out of airports and with tour groups.  Like American officials who came back with glowing reports of the Soviet Union in the '50s, these travelers usually get either a distorted  or an incomplete view of the world economy.

Jim Rogers, after making a killing as co-manager of the Quantum Fund, has traveled the world by motorcycle and car.  Along the way, he learned a lot and developed strongly held views on global economics.  Rogers made his money by strongly backing long-term trends he discovered.  This carries into his personal life.  He has moved his family to Singapore to be at future center of global economics as well as to have his daughters learn Mandarin Chinese.  If you don't know much about Rogers, this could prove to be the most fascinating part of the book.

Probably the first thing, however, that comes to mind for most people at the mention of Jim Rogers is a smart investor who speaks his mind.  He has nothing to lose - there is no "party line" he has to stick to and this, alone, makes Street Smarts:  Adventures On the Road and in the Markets worth reading.

The book has a number of themes.  For example, Rogers talks about how to make a lot of money.  As readers of this blog know, I believe most investors should stick with low-cost index funds for the bulk of their assets.  If you must, confine your aggressive investing to less than 20% of assets.  Having said this, aggressive investors will find Rogers's investment advice worth thinking about.  He shuns diversification and encourages seeking opportunities where the investor has an edge.  He claims that everyone can, with a bit of thought, can come up with ideas.  I frankly am not sure of this.

He takes cars as an example.  You might know a lot about cars, and you might even get a great insight on where things are headed.  Cars may be your passion.  All of this sounds great as the basis of a potential large position.  Still, I claim it usually isn't that easy - you need to know financials and valuation and, most importantly, have the patience of Job.  There once was a story of an economist who tended to walk away muttering "It's more complicated than that" whenever he was presented with an idea.  I'm that economist in this situation.  It's sort of like Ted Williams explaining how it's easy hitting an 80-mile-per-hour slider.

Another Rogers theme is the erosion of the U.S. on the world stage as China moves up.  This, of course, is not original.  Still, given Rogers's on-the-ground travels, his views warrant serious consideration.  What caught my interest was his discussion of Plato's Republic and how the U.S. political system is flawed compared to the Chinese.  He emphasizes that China's government has been transformed from a non-functioning Communist bureaucracy to a capitalistic system that the Western world needs to appreciate as a formidable competitor.  He lauds the systematic buying-up of natural resources by the Chinese and their approach of making friends with Africa.  In the meantime, Rogers notes, the U.S. government is addicted to debt and ruled by K Street lobbyists.

Those interested in the American educational system as well as health care will find Rogers's diatribes interesting.

My complaint with Rogers is I feel he comes down too hard on diversification.  He says on p. 61 "But if you had diversified in 1970, and simply bought a stock average, you would have not have made much money at all in those thirty years."  Actually on 1/2/70, the Dow Jones Industrial Average stood at 800.  Thirty years later, it was at 10,787, for a 13.48 increase per dollar.  This doesn't include dividends!  Sounds like "much money" to me.

Still, this is a fun book and most readers will learn a lot from a smart guy.  It's not every day that you can get in the brain of a big-time successful hedge fund manager and see what makes him or her tick.

My Favorite Investment Chart (Part 2)

In the last post ,we looked at the 1st page of BlackRock's "Asset Class Returns" and saw visually how a diversified portfolio comprised of 65% stocks/35% fixed income performed relative to 7 asset classes over a 20-year period.  The bottom line was that diversifying resulted in less volatility in returns.  The actual diversification involved international stocks, growth stocks, and value stocks as specified in the last line of the footnote on page 1.

Page 2 shows the same results using a $100,000 portfolio at the beginning of the period as well as a graph of the various sector returns over the 20-year period.  Both are worth examining.

The Table:

$100,000 Investment Over 20 years:

Source: BlackRock

CLICK IMAGE TO ENLARGE As you can see, $100,000 increased to $461,667 over the 20-year period.  It is worthwhile stepping back a bit and recalling the period prior to 1992, especially for those who believe the present period is uniquely risky.

In 1987, the stock market crashed. In one day, the Dow Jones Industrial Average dropped over 24%!  This was a period where the U.S. had come through a Savings & Loan Crisis that cost the nation hundreds of billions of dollars.  This was a period where the U.S. experienced a serious banking crisis with the number of bank failures rising to levels not seen since the 1930s.

For the 20-year period covered by the table, there were many reasons, all along, to be investment shy. There was the East Asian crisis, the Russian default, Y2K fears, the dot.com bubble, the 2008 housing crisis/Great Recession ,etc. just to name a few.

Still, over this period, $100,000 increased to $461,667!  Although investors saw clearly the problems mentioned, what wasn't so easy to see were the advances that would be forthcoming- the internet, PCs, cell phones, medical advances, and tremendous global growth!

The Table also shows standard deviation - the basic volatility measure.  As you can see, the volatility was considerably less than the 3 sectors with higher returns.  This is the mathematical expression of the visual depiction we saw in the last post.

The Graph

The graph is also worth contemplating.

Source:BlackRock

CLICK IMAGE TO ENLARGE The graph shows clearly that the faint-of-heart emotional investor undoubtedly had difficulty achieving the performance shown above.  But we know this.  This is exactly what all the academic studies show.

What should also be noted is that the systematic investor would have done even a lot better than the results shown in the Table because of so-called dollar averaging.  During the downturns, the systematic investor would have picked up shares at especially attractive prices.

Conclusion

The conclusion isn't rocket science and is stark.  Most people who consistently saved and invested over this period using low-cost index funds diversified properly should be in great shape today for retirement or at least on the path to a great retirement.

My Favorite Investment Chart

Regular readers of D-I-Y Investor know that the BlackRock "Asset Class Returns" chart is my favorite investment chart.  In fact, one of the first things I do with new clients is go over its main points.  IMHO, time spent with this chart can be more valuable than spending days reading investment books or even blogs.  It gets you past all the salesy mumbo jumbo of the investment world and looks at what actually happened.  It is a great place, IMHO, to start to think about what can happen and how to prepare.

Source: BlackRock

 CLICK IMAGE TO ENLARGE

If I was teaching a course (actually I will be doing an online book discussion of Millionaire Teacher - click "Seminars" tab, above) on investing, an assignment would be to write out a description of the table, explain 3 really important points you get from the table, etc.

The table shows 20 years of color-coded sector returns, ranked with the top performer at the top (with actual returns in each box) and the worst performer at the bottom.  So, for example, if you are interested in how Large Cap Growth stocks performed, just eyeball the purple box.  You'll note that Large Cap Growth was the top performer in 5 of the 20 years.  Notice, as well, that it was the worst performer among the 7 sectors shown for 3 of the 20 years.

The 3-year period 2000-2002 is instructive.  You'll notice that Large Cap Growth ended up at or near to the bottom.  This follows 2 years at the top.  This was a period where many investors got hammered as they piled into Large Cap Growth!

Diversified Portfolio

The real strength of the chart goes beyond the annual relative ranking of sectors.  It shows also a diversified portfolio - the white box.  The diversified portfolio - spelled out in the footnote - is basically 65% stocks and 35% fixed income (bonds).  Important point:  the diversified portfolio is never the top performer but also is only in the bottom three 2 times over the 20-year period!  This is an excellent visual depiction of how diversification reduces volatility!

Next, look at the "Fixed Income" box.  This is the bond market ( not CDs or cash or money markets - but the bond market as represented by the Barclay's Aggregate Index).  As you look at it, notice the "Large Cap Core" box.  This is essentially the S&P 500, the most widely used benchmark in the stock market.  You'll see that "Fixed Income" tends to do well when "Large Cap Core" does poorly. The most stark example is 2008, with "Large Cap Core" down -37% and "Fixed Income" up +5.2%!

Notice other years where "Large Cap Core" had  negative returns.  Eventually the light bulb will go off, and you'll see that "Fixed Income" has been an excellent hedge against drops in the stock market. Understanding the role of "Fixed Income" is very important in portfolio management. 

Another use is to approximate returns for different asset allocations.  For example, if you're wondering how an aggressive allocation of 90% "Sm Cap" and 10% "Fixed Income" did over the period, just calculate the annual returns and multiply.  For 1983, for example, the return was .9*18.9 + .1*9.8 =  17.99.  Multiply the annual returns (use 1.1799) and take the 1/20th root and you've got the average annualized return.

A final use of the chart is to start off with a sum of money, $500,000, say, and draw down 4% at the beginning of the year, using, for example, the diversified portfolio.  In this way, you can get a feel for how a retiree in the decumulation stage would have fared over this period.

The bottom line is that the chart can be used for many purposes, only limited by your imagination.  As a caveat, keep in mind that it is one 20-year period.  The next 20 years will be different.  Still, in some ways, it very likely will be similar.

The next post will look at the second page of the chart.