Richard Shaw's  Instablog

As you think about your asset allocation and return expectations, you should take multiple historical periods into consideration, as well as  current and forward conditions.  The  basic bonds to stocks mix in a portfolio is one of the primary drivers of overall portfolio return.

Short-term data is easy to access.  Long-term data is somewhat more difficult for many investors to find.  We’ll leave the current and forward conditions to you in this article, but this data may be helpful with respect to history.

Note: This is a data presentation.  No intent to offer conclusions.

How have graduated and rebalanced allocations between US bonds and US stocks performed on a total return basis over many time periods, from short to long?

Let’s look at 1, 3, 5, 10, 15, 20, 25, 30 and 34 years (the longest period the US Aggregate Bond index has existed).

The table below presents the total return (price return + dividend and interest return) for the Barclay’s Aggregate Bond index and the MSCI USA Standard Core index from 1976 on an annually rebalanced calendar-year basis.  The return for 2009 is the annualized value for performance through November.

The allocations are in 10% increments for each of bonds and stocks.  The resulting 11 allocations range from an aggressive 0% bonds and 100% stocks, to a conservative 100% bonds and 0% stocks.

click image to enlarge

[ image at QVM site ]

Bonds have been comparatively steady performers over most time periods, while stocks have had substantial variation.  Fortunately for those who remained in stocks through 4Q2008 - 1Q2009, or those of us who exited before that time and re-entered after that time, stocks have done very well this year.

The important take-away is that mean returns vary significantly over time, and must be frequently re-evaluated, and should not be assumed to be constant in the future.

The next table shows how the return variation around the mean stratified based on the bond-stock allocation over the full 34 years of the Barclay’s Aggregate Bond index.  It shows the mean total return, the worst calendar-year loss, the best calendar-year gain, the standard deviation of annual total return, the number of loss years out of 34, and the statistically suggested range of high to low return for 96% probability (mean return +/- 2 std. dev.) were the future variation to closely resemble the past variation.

[ image at QVM site ]

Reasonable proxies for the US stock market are: SPY and IVV (each tracking the S&P 500 index), IWV (tacking the Russell 3000 index), and VTI (tacking the MSCI US Broad Market index) .  Reasonable proxies for the US aggregate bond market are: AGG, BND and LAG (each tracking the Barclay’s US Aggregate Bond index).

Within the high variability of returns for US stocks has been a comparatively stable and consistently positive dividend yield.  Investors might chose between pursuing price performance or pursuing dividend cash flow.  Rebalancing among yielding instruments can have the effect of improving cash flow.

This multi-decade chart of US stocks total return, price return and dividend return illustrates the relative steadiness of investment cash flow versus investment market value.

[ image at QVM site ]

Unlike conventional bond interest, stock dividends tend to grow over time (the past 12-months being an unusual exception).  Note that dividend yield fluctuates up and down as price fluctuates, even though the amount of dividends themselves tends to increase.

Over the approximate 40 years of the MSCI USA stock index, the mean total return has been about 9.5%, of which approximately 6.0% has been price return and approximately 3.5% has been dividend return (roughly 37% dividend return and 64% price return).

For those drawing on portfolios to support lifestyle, and who can live with about a 3% draw on current portfolio value, steady stock dividends can create peace of mind while market prices fluctuate.  Many investors, of course, are not so well endowed and must be acutely concerned about the effect of a constant or growing draw on a fluctuating portfolio value.  Outliving assets is a terrible thing to happen.

The past is not the future, but it’s a good idea to be aware of the past when understanding the present and trying to see into the future.  We hope these data will be helpful to the do-it-yourself investor who may be overwhelmed by the present.

Compliance Disclosure:

We own SPY, VTI, AGG and BND in some managed accounts. We do not own other mentioned securities. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.

Richard Shaw
QVM Group LLC

Disclosure: We own SPY, VTI, AGG and BND in some managed accounts. We do not own other mentioned securities. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.

How has gold performed in the 42 years since 1967 when it last traded at a fixed price of $35 in the US?

Let’s look at it versus the total return of the S&P 500, the total return of 1-yr T-Bills, West Texas Intermediate Crude and the Urban Consumers All Items Consumer Price Index?

The chart shows the performance of each item indexed to 100 as of 1967.

Gold has had its ups and downs, as have oil and stocks.  How well you would have done holding it, of course, depends on when you would have acquired and sold it.

Gold generally rose from 1967 to the late 1970’s, then generally declined until about the time of the Dot.com bust and the 9/11 terrorist attacks on New York City, and has subsequently been rising aggressively.  Oil began rising aggressivly at about the same time, but lost its momentum and declined with the 2008 economic crash.  US stocks are still ahead of gold over the entire 4+ decade period.

Clearly, there were times when gold was a better holding than stocks, and there were times when stocks were better holdings than gold.  That’s where asset allocation practices come into play to enhance total portfolio return.

SPY and IVV are proxies for the S&P 500.  GLD and IAU are proxies for gold.

Compliance Disclosure:

We own GLD and SPY in some managed accounts. We do not own other mentioned securities. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.

Richard Shaw
QVM Group LLC

Disclosure: We own GLD and SPY in some managed accounts. We do not own other mentioned securities. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.

The well worn phrase, “All that shines is not gold” can be turned about when talking of investing in gold to say, “All that’s gold does not shine.”

Gold has been a fine investment as of late, but how has it done over a long period?  How about over a lifetime of investing in comparison to other major assets, such as 3-month Treasuries, US aggregate bonds, and all country world stocks?

We have data to answer that question from 1976 (34 years ago, and around about the time this author began saving for investment in an organized way).

If you began with $100 in each class in January 1976, and taxes were deferred as they could have been in a Keogh plan,  or if the account were tax-free as in a non-profit organization, the values of each position at the end of November 2009 would have been:

• 3-month Treasuries (proxy: SHV) - $648.92
• US aggregate bonds (proxies: AGG and BND) - $1,576.19
• All country world stocks (proxy: VT) - $3,185.52
• Gold (proxies: GLD and IAU) - $814.49.

So, over the long-haul of the past, gold was better than short-term Treasuries, but not as good as diversified bonds, and nowhere near as good as global stocks.

That is not to say that gold will not be better than the others going forward, but we have been through tough times before, and in the end stocks won.

We have serious doubts about US stocks (proxies: SPY, IWV and VTI) doing as well going forward as emerging market stocks (proxies: EEM and VWO), or possibly even European stocks (proxy: VGK).

The key is the value of the Dollar (proxy: UUP) for the future of gold.

The profligate public spending, mountainous national debt, negative import-export balance, anti-capital policies and wealth distribution goals of the government in the US today, and the multi-national call for a new reserve currency do not bode well for the Dollar.  That gives gold a better long-term performance expectation relative to US stocks and bonds than it had in the go-go days of US stocks.

click image to enlarge

Gold versus Other Classes

[ image at QVM site ]

Non-US and global stocks, however, may not be as negatively impacted by a declining Dollar as US stocks in general.

The long-term decline of the Dollar against a trade weighted basket of currencies, does not fully explain the recent strong rise in gold, which seems to be anticipating something more like a global monetary collapse, which we tend to doubt (but if we are wrong, our stop loss orders on all our exchange listed positions will pull our fat out of the fire as they did in 2008 to save us from that devastation).

Gold versus US Dollar Index

[ image at QVM site ]

Compliance Disclosure:

We own GLD, AGG, BND, SPY, VTI, EEM, VWO, and VGK in some managed accounts. We do not own other mentioned securities. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.

Richard Shaw
QVM Group LLC

Disclosure: We own GLD, AGG, BND, SPY, VTI, EEM, VWO, and VGK in some managed accounts. We do not own other mentioned securities. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.