A while back we discussed the flaws with an age based approach to your asset allocation decisions. We would like to expand upon that thought by looking at how a balanced portfolio can lower your volatility and potentially improve your investment results no matter what cycle of life you are in.
For example, let’s take a look at Vanguard’s Wellington Fund. This fund is particularly interesting as it has been around for about 80 years and considers itself a balanced fund. Currently, this fund has about 64% of its assets in stocks and seeks a mix of roughly 60% stocks and 40% fixed income. Since this fund has a less exposure to stocks than an index such as the S&P 500 it is considered less risky and should have less volatility. Thus, it should not go up as much as the S&P500 in good years and should not go down as much in the bad years.
When you go back over the recent past the comparison is shocking. For example, if you were to have invested $10,000 in the S&P500 on 1/31/2000 it would have been worth $9,226.80 ten years later on 1/31/2010. If however, you had instead put that $10,000 in Vanguard’s Wellington fund at the same time it would have been worth $18,563.87 ten years later. If you go back to the year 2000 and examine that ten year period of time you see that Vanguard’s Wellington fund outperformed the S&P500 in seven of those ten years. What is even more surprising is that these were not all down years. Even in positive years for both the S&P500 and the Vanguard’s Wellington Fund such as 2007, 2005 and 2004 the S&P500 was thoroughly trounced.
This speaks to the benefits of diversification, which we believe you should include beyond just stocks and bonds. Mixing gold, silver and other commodities in to your investments would have made the last ten years even more profitable. For now, just remember that an all equity approach is probably not in your best interest, just as an all bond approach is probably not in your best interest.
