Update: Year-to-Date Performance of BlackRock Diversified Portfollio

Regular readers know my favorite investment chart is the BlackRock 20-year sector performance.  It details the relative performance ranking of asset classes on an annual basis as well as the performance of an easily replicated low-cost diversified portfolio comprised basically of 65% stocks, 35% bonds.  As can be seen by referencing the above link, the diversified portfolio returned 8.7% on an average annualized basis over the 20-years ended 12/31/20114.

The diversified portfolio allocation is an appropriate benchmark for many individuals in their 40s and even early 50s, depending on their specific risk tolerance.  The chart contains sufficient data, however, to construct a benchmark and analyze performance for any specific allocation; and, in fact, the allocation can be changed over time using the data in the table--as it should be as an individual ages.

Voluminous data from unbiased academic studies have been presented over the years showing that a diversified portfolio of low-cost funds outperforms upwards of 70% of active managers over the longer term, after all costs are taken into account.  These studies cover various time periods, countries, asset classes, and investment methodologies.  In line with this data, the low-cost diversified approach warrants consideration as a benchmark for investors.  It shouldn't go unnoticed that the approach economizes on the investor's time.

Below is an update showing the approximate performance of the diversified portfolio's sectors for the 6 months ended 6/30/2015.  Overall, the portfolio returned approximately 1.68%, down slightly from the 2.17% reported for the first calendar quarter.

For the 6-month period, sector performance was mixed with the international (EFA) doing best and large and mid-sized value (IWD) lagging.  The bond market (AGG) had a negative return as yields increased over the 6 months.

Weight (%)	Fund	Return (%) 6 months ended 6/30/2015
35	AGG (Barclay’s Aggregate Bond Index)	-0.34
10	EFA (EAFE Index)	6.12
10	IWM (Russell 2000)	4.71
22.5	IWF (Russell 1000 Growth)	3.90
22.5	IWD (Russell 1000 Value)	-0.70

Disclosure:  This post is intended for educational purposes only.  Past performance is not indicative of future performance.  Individuals should consult a professional or do their own research before making investment decisions.

Updated BlackRock "Asset Class Returns"

Source: Capital Pixel

The
updated "BlackRock Asset Class Returns"

two-page chart is out.  This is my favorite investment chart.  It shows 20 years of investment returns for 7 different, color-coded, asset classes including fixed income, international stocks, cash, and various stock sectors.  Most importantly, it shows a diversified portfolio comprised essentially of 65% stock and 36% fixed income and cash.  The actual composition is given in the very last footnote of page 1.

It cuts through all the nonsense and shows vividly that diversification reduces volatility.  It also shows that chasing the hottest sector can be damaging.  Consider, for example, 1998 and 1999 where Large Cap Growth was at the top of the column.  If you would have run into someone claiming that they were hitting the ball in the upper deck with their Large Cap Growth Fund, you would probably have been sorely disappointed in 2000, 2001, 2002 as this sector was near, or at, the very bottom.

Page 2 shows line graphs of each sector over the 20 years.  As you look at this roller coaster experience, recall 9/11, the dot.com bust, and last (but not least) the 2008 housing crisis.  While you are at it, you can recall the ongoing geopolitical problems as well as the periods where it looked like even the U.S. government was on the verge of breaking down.  As you recall all the reasons for grabbing your wallet and seeking a fast exit, grab your smart phone, your laptop, and even your iPad.  You didn't have these 20 years ago.  For that matter, you couldn't get a genome sequencing.

The bottom line is that the constant preaching of stalwarts like Warren Buffett, John Bogle, and Burton Malkiel to ignore the noise and get an asset allocation paid off.  As shown on page 2, the diversified portfolio turned $100,000 into $531,326.  The average investor over this period did considerably worse - especially those trying to pick stocks and/or time the market.  This includes the parade of pontificators on CNBC, mutual fund managers and even the largest college endowments in the country.

I like to track the BlackRock diversified portfolio and

estimated the 2014 return

on New Year's Day at 7.96%.  As shown on the chart, it was 8.1%--so I was off by only.14%.

1st Quarter Performance - BlackRock Diversified Portfolio

Source: Capital Pixel

Regular readers know my favorite investment chart is the BlackRock 20-year sector performance.  It details the relative ranking of asset classes on an annual basis as well as the performance of an easily replicated low-cost diversified portfolio comprised of 65% stocks, 35% bonds.  The diversified portfolio returned 8.3% on an average annualized basis over the 20-,years ended 12/31/2013.

The diversified portfolio allocation is an appropriate benchmark for individuals in their 40s and even early 50s, depending on risk tolerance.  The table contains sufficient data, however, to construct a benchmark and analyze performance for any specific allocation; and, in fact, the allocation can be changed over time--as it should be as the individual ages.

Voluminous data from unbiased academic studies have been presented over the years showing that a diversified portfolio of low-cost funds outperforms upwards of 70% of active managers over the longer term, after all costs are taken into account.  These studies cover various time periods, countries, asset classes, and investment methodologies.  In line with this data, the low-cost diversified approach warrants consideration as a benchmark for investors.  It shouldn't go unnoticed that the approach economizes on the investor's time.

Below is an update showing the approximate performance of the diversified portfolio's sectors  for the 1st quarter of 2014.  Overall, the portfolio returned approximately 1.74%.

Disclosure:  This post is intended for educational purposes only.  Past performance is not indicative of future performance.  Individuals should consult a professional or do their own research before making investment decisions.

Weight	Fund	Return (%) 3 months ended 3/31/2014	Expense Ratio
35	AGG  (Barclay’s Aggregate Bond Index)	1.87	.08
10	EFA (EAFE Index)	0.61	.34
10	IWM (Russell 2000)	1.11	.24
22.5	IWF (Russell 1000 Growth)	1.08	.20
22.5	IWD (Russell 3000)	2.97	.21

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.

2012 Performance

 Happy New Year!!!!!!!!!!

As readers of this blog know, one of my favorite tools for explaining investments is the BlackRock Asset Class Returns 20-Year Snapshot table.  It shows and ranks annual returns on various asset classes along with a 65% equity/35% fixed allocation diversified portfolio.  The table shows the value of diversification, the payoff to sticking with an asset allocation through market cycles, the role of bonds in the portfolio, and probably other things I haven't thought of.

I believe it is worth spending some time with it and thinking through the implications for the do-it-yourself investor and even those seeking an investment manager.  For these reasons, I like to update it each quarter.

The diversified portfolio is also a good benchmark for a lot of investors.  With 35% in the Barclay's Aggregate Bond Index, it is fairly conservative and would be appropriate for many investors in their mid-30s to mid-40s with a reasonable tolerance for the ups and downs of the market.  Also notable is the fact that the diversified portfolio can easily be replicated with low-cost, well-diversified exchange traded funds.  The low cost isn't just in the expense ratios (shown in the table below) but also in the amount of time required to learn how to manage and then actually manage this type of portfolio.
 

Approximate 2012 Performance of Diversified Portfolio

The table shows returns on the various components of the diversified portfolio. These returns were obtained from Morningstar and based on net asset values.  Overall, the portfolio achieved a return of approximately 10.8% for 2012.

To have achieved close to this return merely required holding the funds or similar funds in the appropriate weighting.  For those of you using Fidelity in your 401(k), you would have achieved similar results with their corresponding Spartan funds.  Vanguard and Schwab, of course, offer funds similar to those shown in the table at low cost. 

The bottom line is that managing your assets isn't really rocket science!  If history is any guide, you'll find that most active managers who try to time the market or pick stocks using fundamental or technical analysis underperformed these results.

Disclosure:  This post is for educational purposes only.  Past performance is not indicative of future performance.  Individuals should do their own research or consult a professional before making investment decisions.  I own, and my clients own, some of the funds mentioned.

2011 Performance - BlackRock Standard Diversified Portfolio

HAPPY NEW YEAR EVERYONE!!!  I had a wonderful New Year's in Ocean City, Maryland with my wife.  The weather was absolutely great.  We stayed at a fun place where the rocking chairs are comfortable and the house wine is perfect.

The view of the surfers from the deck was excellent.  I could appreciate them because I spent a day surfing in Galveston, Texas in the Gulf of Mexico years ago.  I only made it on the board once or twice, but it was fun!

Our stay in Ocean City was great place to welcome the New Year.  I hope everyone's New Year was as enjoyable.

Now, back to the real world.

A useful research piece on market performance  is the "Asset Class Returns: A 20-Year Snapshot" table produced by BlackRock and discussed at Cedar Financial Advisors.  It shows annual asset class returns, color-coded, ranked so that investors can easily see the best-performing and worst-performing sectors for each year over the 20-year period.

Similar so-called periodic tables of investment returns are produced by others, but the BlackRock table is unique in its inclusion of a diversified portfolio.  The diversified portfolio is an excellent benchmark for many DIY investors to consider, in my opinion.  It is comprised of low-cost, index exchange traded funds.  The 20-year annualized return of the portfolio was 8.89% for the 20-year period ended 12/31/2010.

2011
 
2011 was undoubtedly a challenging year for many investors.  Those swayed by their emotions had plenty of opportunities to make portfolio-busting shifts.  Most of those who had a plan and stuck with it probably came out OK.  The table shows performance achieved by various sectors as represented by low-cost ETFs and the weights of the various sectors.  Europe was the obvious drag on the portfolio as evidenced by the -12.17% return on EFA.  Once again, the overall bond market was the knight in shining armor, with AGG returning +7.58%.  Overall the portfolio returned +1.61% for the year. Although below the rate of inflation, many investors would have been satisfied with this return.  For those with the funds parked in money funds or even short-term certificates of deposit, this performance would have been acceptable.

Source:  Data from Morningstar/BlackRock Diversified Portfolio

CLICK IMAGE TO ENLARGE  As a point of reference, the S&P 500 returned 2.11% for the year.




Accumulators vs. Decumulators

My clients include both accumulators and decumulators.  Accumulators seek to take advantage of dollar-cost averaging.  They are contributing a fixed amount to their 401ks, etc.  Down markets benefit them as they buy at lower prices.  Decumulators, on the other hand, can unambiguously get hurt in a down market if they don't have a plan to draw down their nest egg.  Dollar-cost averaging can seriously harm the retiree drawing funds from their nest egg.

2011 was fairly neutral for both as long as no rash portfolio shifts were made.  The following shows the S&P 500 as represented by the SPY ETF:

Source: Yahoo/Finance

 CLICK TO ENLARGE As shown in the chart, U.S. stocks tried to trend upwards over the first half of the year and then hit a serious air pocket from which it again trended upwards.  The second half of the year was extremely volatile, as headlines out of Europe dominated even economic data showing the U.S. economy was showing some life.  In this market, dollar-cost averaging resulted in paying more for shares early in the year compared to where the market ended up.  Still, if investors held in and no shifts were made, shares were accumulated over the later half at attractive prices as the market rebounded strongly in the 3rd quarter.  In other words, dollar-cost averaging paid off over the later 6 months.

By the same token, the decumulator, drawing what is essentially a paycheck off of the nest egg, who had sufficient funds to ride out the downturn participated in the upturn.  In contrast, the decumulator who sold equities to fund cash needs during the first half of the year partially missed out on the rebound.  To stave off this negative impact, those living off their nest egg should have, at a minimum, 9 months in cash and a portfolio yield  dividends and interest) of at least 2.4% to replenish required payments.

Disclosure:  This information is intended for educational purposes.  Individuals should do their own research or consult a professional before making investment decisions.

Performance Report

How are your investments doing? This is a fairly common question these days with Europe dealing with bailout problems, the U.S. worried about a recession, and politicians acting stupider than usual.  Some put all this together and opt for money market accounts.  Unfortunately for many, that won't get the retirement many want.

On a number of occassions, I've posted about asset allocation and how to set up a well-diversified portfolio of exchange traded low-cost funds.  I've touted the performance capabilities of Schwab that enables investors to track their performance on an ongoing basis.

Returning to the question above, the fact is that most investors don't know their performance.  I know because I ask them.  I could probably put together a pretty entertaining comedy tape from the answers I get. The bottom line is that many wait for an advisor's report that arrives weeks after the end of a quarter.  Then even with all the negative news going around, they are afraid to open the report.

Here is a Schwab client performance report through the close of the market yesterday:

Source: Charles Schwab

CLICK TO ENLARGE  This client happens to be in the "Moderately Conservative" model which is basically 40% equities/60% fixed and cash. Note that the return since inception is within .12% of the benchmark (shown as the footnote)  - basically the cost of the fund's ETFs.  This report combines 3 accounts:  taxable, traditional IRA, and Roth IRA.

Although the return is modest at 4.62%, it is considerably better than the return many seniors have achieved on CDs, etc.; and it is at relatively low risk.

Managing risk, of course, is a key element of this process.  At the beginning, client and advisor need to assess risk tolerance because a key is to be comfortable holding the portfolio through ups and downs.

Disclosure:  Past returns are no guarantee of future returns.  Individuals should consult an advisor and/or do their own research before investing.  I am not affiliated with Schwab.  This post is solely for educational purposes.

2011 Year-to-Date Performance - BlackRock Standard Diversified Portfolio

One of the most useful research pieces available for DIY investors, I believe, is the "Asset Class Returns: A 20-Year Snapshot" table produced by BlackRock and discussed at Cedar Financial Advisors.  It shows annual asset class returns, color-coded, on a ranked basis so that investors can easily see the best-performing and worst-performing sectors for each year.

Similar so-called periodic tables of investment returns are produced by others, but  the BlackRock table is unique in its inclusion of a diversified portfolio.  The diversified portfolio is an excellent benchmark for many DIY investors.  It is comprised of low-cost, indexed exchange traded funds, as shown below. The 20-year annualized return of the portfolio was 8.89% for the 20-year period ended 12/31/2010.

The table shows how the return on the diversified portfolio has been much less volatile than individual sectors.  The table also shows the futility of predicting sector performance:  the best-performing sectors many times are the worst-performing sectors in ensuing years.  Overall,  the table is an excellent starting point for the all-important subject of risk management and asset allocation.

The updated performance of the components of the BlackRock Standard Diversified Portfolio over the first 9 months of calendar year 2011 is shown  in  the table:  CLICK TABLE TO ENLARGE 

Data Source: Morningstar

The overall portfolio has achieved a return of -5.14% over the first 9 months of 2011, at an expense of approximately 0.11%.




Disclosure:  The data shown here is for educational purposes only.  No recommendations are made.  Individual investors should do their own research and/or consult with a professional advisor.  Although data has been obtained from reliable sources, its accuracy cannot be guaranteed.  I am not affiliated with BlackRock or Morningstar.  

Investment Performance

This is part 3 of the process used to start a new account.  On Friday, we looked at how the process starts with picking an asset allocation model and why using low-cost indexed funds to match asset classes makes sense.  On Saturday, we looked at how to choose the investments and how they are tracked relative to the chosen model.  For this purpose, I used Schwab, which I use for my clients (mainly because of what I will present today); but many other brokers could be used as well.  Most offer tools for investors to manage their portfolios and more are offering commission free ETFs.  I am not affiliated with Schwab in any way.

The goal is for the investor to reach the point where he or she is comfortable managing his or her own investments after a reasonable time.  The savings are significant.  The particular case considered here involves an account that, by early August, will be approximately $575,000.  The typical advisor would charge 1% to 2% to manage this account.  At 1%, this would amount to $5,750/year.  I charge 0.4% which would be $2,300/year (charged quarterly, i.e. $575/3 months).  The goal is, as stated above, for the client to take over management after a reasonable time - certainly less than a year - in which case the entire management fee will be saved - i.e., stay in the "nest egg" and grow over time.

The setting up of the account and making initial buys and sells to get the account aligned with the model takes some time and trading activity.  That is done by me, with an ongoing explanation of the process to the client along with the reasoning behind the trades.  Sometimes particular assets will be held because they are load funds or they are in taxable accounts and would generate a tax gain, etc.  Once, however, the account is set up, the account needs to be monitored on an ongoing basis to ensure that it is aligned with the model - this is a process that takes a few minutes a week.  For this purpose, I show the client how to use the Schwab table looked at yesterday:

Source:Schwab

CLICK TO ENLARGE The "Difference" column reveals exactly where investments need to be made and is key to rebalancing.  At a minimum, rebalance whenever the asset class gets more than 5% away from target.  Yesterday we saw where to get investments.   I prefer to primarily use Schwab commission-free funds, but there are some others I  introduce when Schwab doesn't offer a comparable fund.

As an aside, it is important to note that the whole process works with individual stocks as well.  So, for example, if the client has 100 shares of Apple Computer, it will be classified appropriately.

Once the account is set up, it requires very little activity.  In fact, as mentioned above, just checking it once a week for a few minutes is usually sufficient.  This is a huge plus because, when markets get volatile, investors get emotional.  The emotions can take over, especially for investors who are not aware of how their portfolio is structured.  Thus, to back up for a minute, a real key to successful investing is to carefully pick an asset allocation that you are comfortable with and understand how your portfolio is aligned with the allocation model.

For those interested in further background on this investment approach, the following are well worth reading :

















Tracking Investment Performance

The next step, monitoring investment performance, is essential.  Schwab makes this easy, and it is the primary reason I use them for my clients.  The account we are looking at here that was opened a few days ago has the following performance:

Source:Schwab

CLICK TO ENLARGE As can be seen, the table shows performance for a number of time periods.  As time goes by, the client will be able to see how s/he is performing on an overall basis as well as versus the benchmark.  Notice that the assets comprising the benchmark ( the "moderately conservative" model) are shown in the footnote.

To summarize:  once the account is set up, there is not a whole lot of activity.  The positions are easily monitored relative to the desired allocation.  When interested, the performance can readily be examined by looking at the above table.  The days of waiting anxiously for  quarterly results and not knowing how assets are performing at any particular time are becoming a thing of the past.  The bottom line is that technology has given the average investor the tools to make the entire investment process much more transparent.

Additional Wrap-Up Points

There are some bells and whistles I typically add to  accounts.  For example, I put a few percent of the assets in PFF.  This is a trust preferred ETF that yields 7%.  It is somewhat volatile in that a number of issues are bank issuers.  I monitor the spread between high-yielding bonds and higher rated bonds and, at times, will add HYG - a high yield ETF. 

Also, there are other advisory services that cater to the do-it-yourselfer, low-cost index fund investor.  They advise on an ongoing basis and offer reasonable fees and minimize the time requirement on the part of the investor.  One I recommend that is worth checking out is MarketRiders.  Their mission is the same as mine:  to enable investors to keep more of their nest egg for retirement.

Disclosure:  I own some of the funds mentioned and invest in them for clients.  This information is for educational purposes only.  Investors should do their own research and/or consult with an investment professional.  I am not affiliated with Schwab or MarketRiders.

2011 Year-to-Date Performance - BlackRock Standard Diversified Portfolio

One of the most useful research pieces available for DIY investors, I believe, is the "Asset Class Returns: A 20-Year Snapshot" table produced by BlackRock and discussed at Cedar Financial Advisors.  It shows annual asset class returns, color-coded, on a ranked basis so that investors can easily see the best-performing and worst-performing sectors for each year.

Similar so-called periodic tables of investment returns (just looking at it brings back memories of high school chemistry!) are produced by others, but what makes the BlackRock table unique is its inclusion of a diversified portfolio. The diversified portfolio is an excellent benchmark for many DIY investors. It is comprised of low-cost, indexed exchange traded funds, as shown below. The 20-year annualized return of the portfolio was 8.89% for the 20-year period ended 12/31/2010.

The table shows how the return of the diversified portfolio has been much less volatile than individual sectors. The table also shows the futility of predicting sector performance - the best-performing sectors many times are the worst-performing sectors in ensuing years, Overall,  the table is an excellent starting point for the all important subject of risk management and asset allocation.

The updated performance of the components of the BlackRock Standard Diversified Portfolio over the first 6 months of calendar year 2011 is shown  in  the table:  CLICK TO ENLARGE

Source: Returns from Morningstar

The overall portfolio has achieved a return of 4.83% over the first 6 months of 2011, at an expense of approximately 0.11%.


Disclosure:  The data shown here is for educational purposes only. No recommendations are made. Individual investors should do their own research and/or consult with a professional advisor. Although data has been obtained from reliable sources, its accuracy cannot be guaranteed. I am not affiliated with BlackRock or Morningstar.

Step Three - Monitoring the Investment Portfolio

On Friday and Saturday we looked at asset allocation models - for the American Association of Individual Investors and Schwab, respectively. Asset allocation models specify targeted percentages of asset classes. They are the framework investors use for investing. The breakdown of the percentage to invest in stocks and bonds is the most important step in the investment process. The model is what we need to be able to stick with as the market goes through its fear and greed cycle. Having the right model is crucial in preventing us from succumbing to the emotional ups and downs of the market.

Yesterday we examined Step Two on how to choose investments. We considered sources of exchange traded funds - iShares and broker commission free funds. We also touched on buying individual securities for the small cap sector.

Today we look at Step Three - monitoring the portfolio. I have seen many investors who have an ad hoc investment process primarily because they don't have a means of monitoring their overall portfolio. They have numerous accounts at multiple brokers that they try to track using spreadsheets. In effect, they are using a paper-and-pencil approach that was appropriate 20 years ago but, IMHO, is cave-era stuff in today's age of technology. What is being done by pencil and paper can more easily and efficiently be done with tools provided by brokers.

To see this, let's extend the example used in the previous posts, mentioned above, whereby we picked a model with the Charles Schwab platform and we've made our investments. Where do we stand now?  This is easily answered by using their "portfolio analysis" tool. Here is a  portfolio relative to its model ("Moderate Conservative") showing the actual percentages relative to targeted percentages: CLICK TO ENLARGE

(Source: Charles Schwab)
 
The beauty of all of this is that accounts can be combined. If you have, for example, a taxable account, a traditional IRA, and a Roth IRA etc., all can be combined and analyzed as one portfolio relative to the asset allocation model you have chosen. Forget spreadsheets and data entry. Once a trade is entered, it is automatically put in its asset class and the analytics are available.

As shown in this table, the "International Equity" sector is below target. By buying the appropriate international exchange traded fund, it can be brought back on target in a matter of minutes. The seasoned investor will quickly see the utility for rebalancing purposes.

Note that the discrepancies can easily be viewed in dollar amounts, which is useful in quickly calculating the number of shares to buy or sell.

Another important part of monitoring portfolios is performance. Schwab provides performance up to the previous trading day for various time periods along with the performance of the benchmark: CLICK TO ENLARGE

(Source: Charles Schwab)

I believe that at least 80% of retirement money should be indexed using low-cost index funds. For those, however, who want to try to beat the market with up to 20% of their investable assets, the performance analytics are highly useful. All they need do is segregate their "play account." Then they will have the performance of their "play account" relative to whatever model they want to choose (including the "Aggressive" model which is 95% stock). It won't take long to see if you're the next Warren Buffett!

With these three steps--choosing a model, selecting investments, and monitoring a portfolio--those willing to make a small time commitment can become a DIY investor and keep a great portion of their nest egg  instead of handing it over to high-priced advisors. Voluminous, unbiased research shows that at least 75% of professionals underperform the market, after fees, over longer periods of time.

For those interested in additional detail , I recommend:

Other more advanced recommended books can be found at the "RW Investing Bookstore" link on the right.

Disclosure: I am not affiliated with Charles Schwab, although I do recommend to clients and potential clients that they consider switching to Schwab because of their excellent analytics.

BlackRock 2010 Periodic Table of Returns

Source: Cedar Advisors/BlackRock

The 2010 BlackRock Table of Returns through the end of 2010 covers 9 asset classes/indices on an annual basis from 1991 through the end of 2010. It covers the S&P 500, growth stocks, value stocks, foreign stocks, and bonds. For the first time, it puts in a commodity index and includes the 3-month Treasury bill.

For each year, the categories are ranked with the top-performing sector at the top and the remaining sectors in descending order, all on a color-coded basis.

As in the past, a diversified portfolio--basically 65% stocks/35% fixed income--is also shown. It is notable that the diversified portfolio is never among the poorest 3 performers and only in the top 3 once. Thus, it illustrates the dampening quality of diversification. Over the 20-year period, the diversified portfolio achieved an average annualized return of 8.89%/year (4th place on the list), slightly below the S&P 500 annualized return of 9.14%.

2011 First Quarter Performance - BlackRock Diversified Portfolio Update

One of the most useful tools for individuals in analyzing and understanding long-term investment returns is the so-called periodic table of investment performance. The version produced by BlackRock includes a diversified portfolio comprised of growth stock and value stock ETFs as well as international stocks and fixed income.

The diversified portfolio result reveals the value of diversifying among sectors and indexed investing. The portfolio is easy to set up, can be easily adapted to fit different risk tolerances (by increasing the percent allocated to fixed income to reduce portfolio volatility), and can readily bring in different asset classes if desired.

DIY Investor updates the diversified portfolio at the end of each quarter. The last update was for the 12-month period ended 12/31/2010; this one is for the quarter ended 3/31/2011.

The quarterly results are shown in the table: CLICK TO ENLARGE. For the quarter, the Russell 2000 (IWM) performed the best, value stocks (IWD) came next, followed by growth stocks (IWD). International stocks (EFA) lagged domestic stocks, and the U.S. bond (AGG) was the poorest-performing sector.

The overall portfolio, weighted similar to that used by BlackRock, achieved a return of 4.02%. The alert reader will notice the low expense ratios for the ETFs.

The data was obtained from Morningstar. The information presented is solely for educational purposes. Individuals should do their own research or consult a professional advisor before making investments.