An interesting observation about portfolio returns for the last 20 years

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CULater
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An interesting observation about portfolio returns for the last 20 years

Post by CULater » Wed Mar 25, 2020 8:22 am

I was curious about the returns of a moderately aggressive portfolio allocation (70% stocks / 30% intermediate treasuries) compared to a conservative portfolio (30% stocks / 70% intermediate treasuries) since 2000. We've now experienced three significant bear markets over the last two decades: 2000-2003, 2007-2009, and the one that we're in now.

Portfolio Visualizer (which provides compound annually-rebalanced returns) gives the returns through Feb, 2020. Adjusting those returns using the returns so far for the month of March, I found that the 30/70 allocation has actually outperformed the 70/30 portfolio. $10,000 invested became $29,773 and $28,365 respectively. The maximum drawdown of the 30/70 portfolio over the period was 9.96%, while it was 34.07% for the 70/30 portfolio.

So, at least over the last two decades a more aggressive allocation has not paid off. Of course, that's one period of time and no-one knows what will happen going forward, so that's not a recommendation for everyone to invest conservatively. Nonetheless, the most recent 20-year period illustrates that a more conservative portfolio allocation can hold it's own compared to a more aggressive allocation; which is reassuring for conservative investors such as folks approaching or in their retirement years. The tortoise has kept up with the hare and been a lot less jittery along the way. :D
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MotoTrojan
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Re: An interesting observation about portfolio returns for the last 20 years

Post by MotoTrojan » Wed Mar 25, 2020 8:27 am

Yes, treasuries have had a historic bull market.

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Re: An interesting observation about portfolio returns for the last 20 years

Post by firebirdparts » Wed Mar 25, 2020 8:30 am

It's important, I think, to always lead with "By looking at 20 year returns to today, I chose to start this at an outrageously bloated valuation." It'll be a while before this problem fades away. All last year, it was a problem.
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aiyuanuc
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Re: An interesting observation about portfolio returns for the last 20 years

Post by aiyuanuc » Wed Mar 25, 2020 8:32 am

OP, I think the key is accumulation vs. consumption phase.

If you contribute 3k a month, I bet the 70/30 portfolio will win, bigly.

But you are right in that for people nearing or in retirement, a conservative portfolio makes sense for some.

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Re: An interesting observation about portfolio returns for the last 20 years

Post by tvubpwcisla » Wed Mar 25, 2020 8:34 am

Good observation and thank you for your post. Maybe it is a good idea to have both asset allocations in your portfolio. For example, you could have one part of our net worth allocated to a 70/30 portfolio and another portion dedicated to a 30/70 type allocation. Perhaps that would cover you regardless of the one that outperformed the other?
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Re: An interesting observation about portfolio returns for the last 20 years

Post by TN_Boy » Wed Mar 25, 2020 8:55 am

tvubpwcisla wrote:
Wed Mar 25, 2020 8:34 am
Good observation and thank you for your post. Maybe it is a good idea to have both asset allocations in your portfolio. For example, you could have one part of our net worth allocated to a 70/30 portfolio and another portion dedicated to a 30/70 type allocation. Perhaps that would cover you regardless of the one that outperformed the other?
Hmm, that just means (if you split things evenly) you are 50-50 stocks/bonds ....

Placing money into separate buckets doesn't change what the overall movement of your portfolio is. In fact, it can obscure what is really happening.

Across my savings and investments, I have X dollars. For good or bad, that's the number I think about.

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Re: An interesting observation about portfolio returns for the last 20 years

Post by MotoTrojan » Wed Mar 25, 2020 9:01 am

TN_Boy wrote:
Wed Mar 25, 2020 8:55 am
tvubpwcisla wrote:
Wed Mar 25, 2020 8:34 am
Good observation and thank you for your post. Maybe it is a good idea to have both asset allocations in your portfolio. For example, you could have one part of our net worth allocated to a 70/30 portfolio and another portion dedicated to a 30/70 type allocation. Perhaps that would cover you regardless of the one that outperformed the other?
Hmm, that just means (if you split things evenly) you are 50-50 stocks/bonds ....

Placing money into separate buckets doesn't change what the overall movement of your portfolio is. In fact, it can obscure what is really happening.

Across my savings and investments, I have X dollars. For good or bad, that's the number I think about.
But but but I’m 100% equities! Says the guy with $50K in the S&P500 and a $50K emergency fund.

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Re: An interesting observation about portfolio returns for the last 20 years

Post by rascott » Wed Mar 25, 2020 9:02 am

Most people didn't lump sum everything 20 years ago.... and then do nothing..... so it's a rather pointless exercise. Nobody actually invests this way.

Most have been contributing/ buying throughout..... and most likely been increasing contributions along the way. I know I've bought more than the prior year for at least the last 17 years and counting.

Bonds were also paying like 7% 20 years ago..... good luck with that allocation over the next 20.
Last edited by rascott on Wed Mar 25, 2020 9:05 am, edited 1 time in total.

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Re: An interesting observation about portfolio returns for the last 20 years

Post by as9 » Wed Mar 25, 2020 9:05 am

rascott wrote:
Wed Mar 25, 2020 9:02 am
Most people didn't lump sum everything 20 years ago.... and then do nothing..... so it's a rather pointless exercise. Nobody actually invests this way.

Most have been contributing/ buying throughout..... and most likely been increasing contributions along the way. I know I've bought more than the prior year for at least the last 17 years and counting.
Yeah, how does this look if you start with $10k and contributed $500/mo over those 20 years?

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Re: An interesting observation about portfolio returns for the last 20 years

Post by TN_Boy » Wed Mar 25, 2020 9:22 am

MotoTrojan wrote:
Wed Mar 25, 2020 9:01 am
TN_Boy wrote:
Wed Mar 25, 2020 8:55 am
tvubpwcisla wrote:
Wed Mar 25, 2020 8:34 am
Good observation and thank you for your post. Maybe it is a good idea to have both asset allocations in your portfolio. For example, you could have one part of our net worth allocated to a 70/30 portfolio and another portion dedicated to a 30/70 type allocation. Perhaps that would cover you regardless of the one that outperformed the other?
Hmm, that just means (if you split things evenly) you are 50-50 stocks/bonds ....

Placing money into separate buckets doesn't change what the overall movement of your portfolio is. In fact, it can obscure what is really happening.

Across my savings and investments, I have X dollars. For good or bad, that's the number I think about.
But but but I’m 100% equities! Says the guy with $50K in the S&P500 and a $50K emergency fund.
Well, I don't have a separate emergency fund. :happy My bonds are fine for that.

One belief of mine that has gotten stronger over the years is that saying "this money is for X, this for Y" is *generally* a bad idea -- it makes it harder to think about how you stand.

That said, for someone younger investing, it makes sense to me that the emergency fund, while part of your net worth, is not part of your investment asset allocation - it needs to be safe and by definition is not designed to fund your retirement. So in your probably tongue-in-check example, I think the guy's investment portfolio is 100% stocks: it's not like he should use money in the emergency fund to re-balance ...

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Re: An interesting observation about portfolio returns for the last 20 years

Post by CULater » Wed Mar 25, 2020 9:24 am

For retirees and others who were not accumulating, but were taking portfolio withdrawals the difference is even larger. With 4% (inflation adjusted) annual withdrawals and a $10,000 initial balance, the current portfolio value (in nominal dollars) for a 70/30 allocation (stocks/bonds) would be $8,980. For 30/70 it would be $12,501. In inflation-adjusted dollars that would be $5,942 vs. $8,134 for 70/30 vs. 30/70. So much for the idea that you always need to have a high equity allocation in retirement to offset inflation (at least over the last 20 years). Volatile portfolios are particularly disadvantageous for those who are drawing down their portfolios for living expenses, and the last two decades have provided plenty of that.
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Re: An interesting observation about portfolio returns for the last 20 years

Post by rascott » Wed Mar 25, 2020 9:25 am

as9 wrote:
Wed Mar 25, 2020 9:05 am
rascott wrote:
Wed Mar 25, 2020 9:02 am
Most people didn't lump sum everything 20 years ago.... and then do nothing..... so it's a rather pointless exercise. Nobody actually invests this way.

Most have been contributing/ buying throughout..... and most likely been increasing contributions along the way. I know I've bought more than the prior year for at least the last 17 years and counting.
Yeah, how does this look if you start with $10k and contributed $500/mo over those 20 years?

Even that doesn't tell a great picture. I buy literally 10x the amount today that I did 15 years ago..... almost nobody has constant contributions.

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Re: An interesting observation about portfolio returns for the last 20 years

Post by ignition » Wed Mar 25, 2020 9:27 am

Nice cherry picking

rascott
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Re: An interesting observation about portfolio returns for the last 20 years

Post by rascott » Wed Mar 25, 2020 9:28 am

CULater wrote:
Wed Mar 25, 2020 9:24 am
For retirees and others who were not accumulating, but were taking portfolio withdrawals the difference is even larger. With 4% (inflation adjusted) annual withdrawals and a $10,000 initial balance, the current portfolio value (in nominal dollars) for a 70/30 allocation (stocks/bonds) would be $8,980. For 30/70 it would be $12,501. In inflation-adjusted dollars that would be $5,942 vs. $8,134 for 70/30 vs. 30/70. So much for the idea that you always need to have a high equity allocation in retirement to offset inflation (at least over the last 20 years). Volatile portfolios are particularly disadvantageous for those who are drawing down their portfolios for living expenses, and the last two decades have provided plenty of that.
What is actionable about any of this? Bonds are currently around 1%....20 years ago they were closer to 7%.

You've also cherry picked extremes in the equity markets.

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Re: An interesting observation about portfolio returns for the last 20 years

Post by heyyou » Wed Mar 25, 2020 9:31 am

I'm impressed with how randomness can take any shape in small sets of data which due to the money involved, is very important to so many. We wouldn't even notice this in weather events, since the history is of such little consequence to the urban public.

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Re: An interesting observation about portfolio returns for the last 20 years

Post by nisiprius » Wed Mar 25, 2020 9:35 am

The big problem with, frankly, everything is that if you just keep gradually moving the starting date back farther and farther, the overall results vary a lot and the relative performance of various strategies keep changing. It is almost impossible to overstate how big these changes are. Even something as basic as "the historic return of the stock market" over periods as long as 90 years can come out anywhere from 9% to 11% with fairly small changes in endpoint dates, yet everybody always quotes numbers like "10.83%" instead of saying "Oh, maybe 10%±1%."

Anything with small-cap value in it will look great if the time period goes back to 2000, mediocre from 2003 on.

US and international have leapfrogged. Most pairs of assets or strategies leapfrog, and the leaps are often 5-10 years or more. So when you look at a time period like 20 years, which seems... very long when you are living through it... you are really looking at only maybe three data points, three regimes, three "environments."

So you do what you can, but it does get very tedious when everyone talks as if whatever period they looked at represents the long-term reality.

The only thing you can do, and it is far from an adequate answer, is to insist, absolutely, on people presenting a chart to give a reason for the choices of endpoints. That would seem obvious but it is really amazing how often it is omitted. Even if it's something like "all available data in PortfolioVisualizer" or "limited by inception date of the youngest fund" at least it's a reason. For 1926 or thereabouts, the reason is usually "start of CRSP data," but people should say so. If 1871, the reason is usually "start of the Cowles Commission data," but people should say so.

If someone just kind of says in passing something like "over the past 23 years" or "since 1950" as if, well, of course you'd pick those as starting dates, then, frankly, that trips my BS-detector.
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Re: An interesting observation about portfolio returns for the last 20 years

Post by CULater » Wed Mar 25, 2020 9:59 am

Gee, results vary depending on the historical time period you select! :o
So, let me grab my crystal ball so I can tell you what WILL happen over the next 20 years.
Damn! I dropped it.
All I have to go by is what happened during the last 20 years. Since I had to live through those 20 years, it happened to me. And I might live long enough to get through the next 20, which have started off with a real bang.
I'm a retiree living off my portfolio. Based on what I know HAS happened I'll be sure to keep a conservative equity allocation, and disregard any advice that I should have a larger equity allocation (also based on backtesting). Bogle's advice to hold "age in bonds" dictates no more than around a 30% equity allocation at retirement. We know that would have been really good advice over the last two decades.
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