On the road to riches and diamond rings…

Historically speaking, a portfolio comprised of all US stocks is the surest way to build wealth. Unfortunately, this portfolio carries with it the highest volatility imaginable and is almost impossible for most people to maintain. There have been zero rolling 20-year periods between 1926 and 2013 during which stocks have had a negative return. This period includes both World Wars, Vietnam and Korea, multiple conflicts in the Middle East, the lost aught’s decade between dot com and credit busts, the stagflation seventies, the crash of ’29 and the Great Depression. 

Through all of that, US equities have produced positive returns during 100 percent of all rolling 20-year periods – starting at any month and any year you’d like – for the last ninety years or so. 

But who can really tolerate the volatility of a 100 percent stocks portfolio with no mitigating diversification over the course of two decades? Not many people. Nor do they need to, quite frankly.

DYI Comments:  Below are historical average annual returns calculated by Vanguard Group of Funds.

 100% stocks

Historical Risk/Return (1926–2013)
Average annual return	10.2%
Best year (1933)	54.2%
Worst year (1931)	–43.1%
Years with a loss	25 of 88

80% stocks / 20% bonds

Historical Risk/Return (1926–2013)
Average annual return	9.6%
Best year (1933)	45.4%
Worst year (1931)	–34.9%
Years with a loss	23 of 88

60% stocks / 40% bonds

Historical Risk/Return (1926–2013)
Average annual return	8.9%
Best year (1933)	36.7%
Worst year (1931)	–26.6%
Years with a loss	21 of 88

40% stocks / 60% bonds

Historical Risk/Return (1926–2013)
Average annual return	7.8%
Best year (1933)	27.9%
Worst year (1931)	–18.4%
Years with a loss	16 of 88

DYI Continues:

How much tolerance for market drops are you able to endure when seeking higher returns?  Have you ever really experienced a loss of 30% to 40%?  Thinking about it is one thing but actually living through it is quite different.  Stats have shown that the average investor (and most of us are really average) will not tolerate a peak to trough decline greater than 20%.  The majority will abandon their aggressive allocation for a stock/bond mix that is far more conservative.  Unfortunately most will make the change when the market is bottoming instead of becoming aggressive to take advantage of the lessor prices.  However, it is not that terrible as long as they stay at that allocation.

Major Stock Market Peak to Trough Declines. 

Loss                      % in Stocks

35%                            80%

30%                            70%

25%                            60%

20%                            50%

15%                            40%

10%                            30%

  5%                            20%

  0%                            10%

Pensions such as 401k's, Roth IRA etc. I advocate a 40% stock to 60% bond allocation for these pensions which are by their very nature conservative.  This ends the roller coaster however it will require addition money invested to make their goal for the return will be less.

Outside of a pension those seeking higher returns may want to use our Max Aggressive portfolio.

DYI