Money makeover, day ten – it's all about diversification
by Peter Switzer
The Wall Street Journal and The New York Times recently looked at the performance of shares over the past decade. The themes of their stories were that shares had under-performed pretty badly. However, incomplete pictures were put into focus with these snapshots.
Thrill seekers only need apply
Collectively these articles told any reader that if you are a thrill seeker, who won’t whinge if you lose your investment by being only in shares, then you don¹t have to be a diversified investor. Most of us don't fall into this category.
Switzer in the Big Apple
When I was in New York perusing The Wall Street Journal, I read that the poor old American share investor had copped a decade of negative returns from shares! But the bad story became even worse when you threw in an adjustment for inflation.
At the time, the Dow Jones Industrial Average was at 10,502.10, which it also was in 1999. Ten years had passed and the index was no higher, but once you put today's level into 1999 dollars, the Dow would have to be at 13,460 to break even!
Taking a different look at the share situation 2000-2009 – the noughties, if you like, where the return was in the nought region – The New York Times suggested we think again.
For the shares obsessed
If you use the Vanguard index for the S&P 500 index of US shares, $100,000 invested on 1 January 2000 would have shrunk to $89,072 by mid-December 2009. Adjusted for inflation, it ends up being $69,114. But this would be the sad story of a shares-only investor.
Why it pays to diversify
The diversified investors did a lot better.
If someone put $50,000 in Vanguard’s Total Stock Market Index Fund and $50,000 in Vanguard’s Total International Stock Index Fund, the $100,000 would now be $109,334, but with inflation-adjustment that goes to $84,921.
Now let’s get more diversified
With $25,000 in each of the above share funds and $50,000 in Vanguard’s Total Bond Market Index Fund and the starting $100,000 grows to $145,619 and $112,971 with inflation thrown in.
If you diversify
Now this was a decade for Americans where they had two recessions and two market crashes – the tech bust of 2001 and the 2007-09 crash. The result was not bad for the diversified investor.
The New York Times also showed what happened to someone who put a $1000 a month into these three investments, rebalancing each year to keep the break down of 25 per cent in US shares, 25 per cent in overseas shares and 50 per cent in bonds.
This person would have invested $220,000 over that time, but this grew to $313,747 or $260,102 when inflation is factored in.
Aussie share performance better
By the way, in Australia, we did a lot better out of shares over the decade.
While the Yanks lost 1.3 per cent, our market grew by 12.7 per cent, which was the best of the Western stock markets.
Apologies to Warren Buffett
I’m an absolute fan of Warren Buffett but he has been reported as saying that “diversification is for wimps”. While he might be right, that’s the way I like to invest my money… and other people¹s money!
Why advice is important
Also this story shows the value of rebalancing a portfolio and is one of the many services a good and trustworthy financial planner should do for you, if you can’t do it yourself.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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Published on: Wednesday, January 06, 2010blog comments powered by Disqus