Bogleheads

[mptfan]

...in the average annual returns of a broadly diversified low cost portfolio.

Case in point: The average annual return of Vanguard's four different LifeStrategy funds since their inception 15 years ago has been almost the the same. Here are the average annual returns of each fund since inception in 1994 as of October 31, 2009:

Lifestrategy Growth Fund: 7.08%
Lifestrategy Moderate Growth Fund: 7.21%
Lifestrategy Conservative Growth Fund: 7.02%
Lifestrategy Income Fund: 6.91%

So over the last 15 years, the difference between the most aggresive and the most conservative fund only amounts to less than 1/3 of one percent per year! That's a tiny difference!

Of course, all of these funds are broadly diversified among U.S. and international equities, and they are very low cost, and the volatility was much greater each year for the more aggresive funds. I fully understand that volatility is very important, especially for those who need to withdraw from their savings every year in retirement. My point is not to say that asset allocation is not important.

[Taylor Larimore]

Hi mptfan:

[Adrian Nenu]

Over the last 20 years US large cap stocks have had equal or worse returns than bonds but with a lot more risk.

I like these LS stats for 2008 and 2009 first quarter returns because they give a more accurate picture of the various degrees of equity risk involved, depending on the stock/bond mix:

LS Income - (10.53%), first quarter of 2009 - (2.30%)

LS Conservative Growth - (19.52%), first quarter of 2009 - (4.72%)

LS Moderate Growth - (26.50%), first quarter of 2009 - (7.29%)

LS Growth - (34.39%), first quarter of 2009 - (9.75%)


Taking on more equity risk does not have to translate into higher returns.


Adrian
anenu@tampabay.rr.com

[mptfan]

Adrian, you are saying that 3 months of returns gives a more accurate picture of risk than 15 years of returns?

[Adrian Nenu]

[Rodc]

Last year I looked at the CAGR for my investments back to 1991 (ie how much I invested each month) and I compared to 100% stocks to 100% bonds, sliding by 10% (90/10, 80/20, etc.)

I checked 8/1/2000. The higher the stocks the higher the return, by a landslide! Range was 21.46% down to 6.72%.

I checked on 9/1/2002. Now the higher the bonds the higher the return, a complete switch, but a tighter range: 4.08% (100% stocks) to 7.74% (100% bonds).

I checked 11/1/2007. Stock heavy portfolios back in the lead! Range 9.05% to 6.06%.

I checked 10/16/2008. Another switch, bond heavy portfolios back in the lead! Range 2.74% to 5.70%.

My personal returns were running about even with the returns for the 80/20 portfolio which is consistent with the allocation I had over most of those years (was 70/30 when the big dive hit).

I checked my personal return, but not all the others, on 3/1/2009 right about what turned out to be the bottom. My 17 year CAGR had dropped to 0.99%. Surely the bond heavy portfolios were well in the lead on that date.

I checked my personal return, but not the others, on 9/1/2009. My personal return was back to 5.27%, which would be pretty close to the total bond return, so all the portfolio would no doubt be pretty close now.

Right now we are at a single time where the return graphs happen to have come to a point. But do not mistake that to mean that the amount of bonds plays no important role in returns. This is simply an accidental point in time. It is likely that in a fairly short period of time they will have diverged again.
_________________
"all standard caveats apply"

[mptfan]

[Adrian Nenu]

[mptfan]

[neverknow]

[bottlecap]

It is an interesting comparison at first blush, but really just another way of saying that stocks have returned about as much as bonds over the last 15 years. This is not surprising given the low stock market returns over the last ten years and the more recent decline from all time highs. If you compared the 15 year returns 8 months ago, the bond heavy portfolios would have likely had better returns than the stock heavy ones. If you compared the 15 year returns 2 or 10 years ago, my guess is that the stock heavy funds would have won handily.

An interesting question would be how much different would the returns be if you DCA'd over the last 15 years in each fund (and perhaps rebalanced). I can envision scenarios in which DCAing would win and lose compared to the simple growth of a dollar in each of the funds.

[EmergDoc]

[baw703916]