Source: Morningstar Direct 2016. 65/35 Index Mix: 2% Cash, 16% ST US Fixed Income, 17% Global Bonds, 15% US Large, 12% US Value, 8% US Small, 4% US REITs, 14% Intl Large Value, 7% Intl Small, 5% Emerging Markets Value; rebalanced monthly. Index representation as follows: U.S. Large Cap (S&P 500 Index), U.S. Value Stocks (Russell 1000 Value Index), U.S. Small Company Stocks (Russell 2000 Index), U.S. Real Estate Market (Dow Jones U.S. Select REIT Index), International Developed Value (MSCI World Ex USA Value Index (net div.)), International Small (MSCI World Ex USA Small (net div.)), Emerging Markets (MSCI Emerging Markets Index (net div)), Global Bonds (Citi WGBI 1-5Yr Hdg USD), US Bonds (BofA ML Corp & Govt 1-3 Yr TR).
Past performance is not a guarantee of future results. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Treasury notes are guaranteed as to repayment of principal and interest by the U.S. government. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Fixed income investments are subject to interest rate and credit risk. Emerging markets involve additional risks, including, but not limited to, currency fluctuation, political instability, foreign taxes, and different methods of accounting and financial reporting. Real estate securities funds are subject to changes in economic conditions, credit risk and interest rate fluctuations. All investments involve risk, including the loss of principal and cannot be guaranteed against loss by a bank, custodian, or any other financial institution. Diversification neither assures a profit nor guarantees against loss in a declining market. The risks associated with investing in stocks and overweighting small company and value stocks potentially include increased volatility (up and down movement in the value of your assets) and loss of principal.
This article will be featured in the spring edition of our 360 Insights Quarterly Client Newsletter.
Whenever markets take a dip, it’s natural to question performance. Is my portfolio behaving differently than it should? Is this downturn worse than the last one? Is it different this time?
In general, globally-diversified investors can answer “NO” to all of the above. We looked at the range of returns of a 65% stock, 35% bond allocation over any 12-month period back to 1972. The chart above shows various time periods with a high, low and average return represented.
Even for this “moderate” 65/35 mix, the range of returns over any one-year period has been relatively large — a gain of 42% on the upside with a loss of 34% on the downside. However, as you start to move to the right on the chart — going to longer holding periods — the range of outcomes narrows substantially.
Once you reach 10-year holding periods, you’ll notice that we have never experienced a negative 10-year period. In fact, the worst total return a buy-and-hold investor has seen over any decade-long period was a 2.6% annualized gain.
When you go out to 20 years, the worst result rises substantially to a 6.5% annualized gain. More importantly for planning purposes, the range of returns between the best and worst historically narrowed dramatically to +15.1% on the high end to +6.5% on the low end.
At 20 years, the range of returns between the best and worst historically narrows dramatically. The average return over all periods is just short of 11%, showing us that the longer you can maintain that diversified exposure the more likely you are to capture long-term market rates of return.
Despite negative returns in 2015 on a 65/35 asset mix, the 5-, 10- and 20-year periods all remain strongly positive.
Whether you are in your thirties or your sixties, chances are your investments still have a long time horizon and can weather daily, monthly or yearly ups and downs. History tells us we have a much better likelihood of meeting our goals based on time spent in the market rather than any attempt at timing the market.