Last week I opined concerning the dangers of the supposedly conservative strategy du jour, that of having only guaranteed, fixed income investments such as bonds, CD’s, or fixed annuities. Today we will look back at relative performance of different assets during the Teens decade to see if, even during the bull market for bonds that continued the past decade, would have been wise.
In the past decade, through battles of Congress and President Obama leading to government shutdowns and of Congress and President Trump leading to impeachment, painfully slow economic growth, zero interest rate programs of the Fed, continuing terrorism in the world, on and on–owning pieces of companies (stocks) reigned supreme. The end results may amaze you.
Index 2010-19 Total Return
Nasdaq 100 369%
S&P 500 256%
DJ Ind. Avg. 251%
Russell 2000 205%
High Yield Bonds 107%
BbgBarc Agg. Bonds 44%
Recall that some promote only fixed income for safety, that you should just spend less than these meagre returns for long term success. At less than 4 percent total return before taxes and inflation, you had better not need too eat much. Even junk bonds do not provide enough safety and return in the long term by themselves.
Therefore, we are proving the superior nature and effects of diversification. Consider the addition of only 20 percent stocks to your portfolio. Worth a little more volatility? That 44 percent total from bonds equals 3.75 percent per year. Adding 20 percent of the S&P 500 to 80 percent of the same bonds would have increased the return to a compounded 5.68 percent per year.
Just that extra 1.93 percent would give you a much higher probability of success so that your money may last as long as you do. Investing according to what is safe at this moment and sticking with it is a recipe for disappointment and disaster. Diversification is priceless!
*The MSCI EAFE PR USD index.
(all benchmark performance numbers provided by Morningstar)