Why Your Portfolio Should Be Near an All Time High

Last Updated Jan 8, 2010 5:50 PM EST

2007 ended in the fifth strait bull year where U.S. stocks nearly doubled and international stocks tripled. Most of us (including me), had no idea that on the horizon lurked the biggest and fastest bear market to hit the U.S. since the great depression.

The stock market has rebounded greatly, but indexes are still far below their levels at the end of 2007. So how much should your portfolio be down? Disregard the doom and gloom that you've probably read, because I'm going to argue that this grizzly-sized bear market should have resulted in you only losing 6 percent of your portfolio. And to illustrate why I think so, let's use a moderate portfolio I define as 60 percent equities (two-thirds US) and 40% bonds.

The portfolio
No hindsight was used to construct this portfolio. It does not contain previous high performers, nor is it over weighted in commodities and avoiding financial like the plague. It's comprised of the three broadest index funds used in the Second Grader Portfolio.

40% Vanguard Total Stock Market VTSMX

20% Vanguard Total International VGTSX

40% Vanguard Total Bond VBMFX

Portfolio returns
Below are the returns for each fund for each year. The portfolio got pounded in 2008, losing 21.6 percent, but gained 21.3 percent the following year. Much as I wish the math worked out that an identical percentage gain and loss zeroed out, it doesn't. Still, this portfolio lost only 5.9 percent over the particularly dismal two year period. After five years of a raging bull, this isn't too shabby.


Bottom line

In the wake of such a strong market, a pullback of 5.9 percent is not exactly a disaster. Even the full decade, with two of the worst bear markets ever seen, wasn't the lost decade it has repeatedly been called. Actually, with a 3.5 percent annual return, and in real terms, it bested the decade of the 1970's. I have a plaque in my office with a motto that reads (in Latin) "Fortune favors the brave." Investing takes some guts and we better be able to handle the pain or get out of the game altogether.

Why you lost more than five percent of your portfolio

Sadly, most people lost far more than five percent over the two year period. Just looking at 2008, average mutual fund equity returns were about two percentage points lower than the index funds. The average taxable bond fund returned a whopping thirteen percentage points less than the total bond fund. And rebalancing back to 60 percent equities in the beginning of 2009 wasn't something investors, or most advisers, had the stomach to do.

My advice

As painful as this might be, compare your 2009 closing statements with those of the glory days of 2007. If you have lost more than five percent of your value, excluding putting new money in or withdrawals, you're probably on a very wrong track. To put yourself back on the right one, set a conservative allocation of low cost broad funds, and commit yourself to sticking with that allocation come hell or high water.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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