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Tuesday, February 5, 2013

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 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.

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.


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.

1 comment:

  1. Interesting that Large Cap Value came out on top..... but that is side issue. The clear message is consistent, long-term investing yields very satisfactory results.