- Is my portfolio safe in this volatile market?
- Am I a long or short term investor?
- What are my current investment goals?
- Am I a passive or active investor?
In this volatile market condition, investors are concerned on how to diversify their portfolio. Every investor is different based on their goals in life, they wants to invest for growth, save for retirement, family support, children's education, vacation, etc. I am trying to create a safe haven portfolio where investor can decide how much risk they want to take and keep their portfolio diversified for better returns. Consider keeping 100% of your asset in the market as 100% risk, because your asset is always exposed to the market ups and down. Keeping all your asset in the equity keeps you happy when the economy is doing well and there is momentum in the stocks, you will enjoy the ride and reap the benefits of this investment. But in bad economic conditions when the market is taking a nose dive or losing its stream to give the positive return, we experience market crash. In early January2008 SPY lost nearly 35% of its value, which effected every mutual funds, Index fund, ETF, stocks and finally investor's portfolio. Many 401K lost 35% of the money just in couple of months. Such kind of disaster is inevitable and historical data proves that the economic cycle keep repeating with ups and down.
I am giving some example of portfolio with diversifying your asset into equity and bonds. For equity I am considering IWM - iShares Russell 2000 Index (ETF) and for bonds TLT - iShares 20+ Year Treasury Bond ETF. Below data shows how your portfolio varies for last 14 year starting 2002 to 2017. I am considering the market crash of 2008 to consider right data with ups and down.
50/50 Portfolio - For year 2002 - 2017, keeping 50% in IWM and 50% in TLT, we see that the portfolio returns are 116% whereas SPY is 107%
In year 2008, when SPY lost -27%, the 50/50 portfolio gain 3% as the TLT was up 24%.
Considering year 2009-2017, when SPY was up 243%, 50/50 was up 148.64%, which is less compared to SPY 243%.
60/40 Portfolio - For year 2002 - 2017, keeping 60% in IWM and 40% in TLT, we see that the portfolio returns are 130.6% whereas SPY is 107%
In year 2008, when SPY lost -27%, the 60/40 portfolio lost -1.2% as the TLT was up 24%.
Considering year 2009-2017, when SPY was up 243%, 60/40 was up 175.91%, which is less compared to SPY 243%.
With different compounding rates we see that 60/40 portfolio still gets 6% compounding return in long run from 2002-2017 and lost only -1.2% during market crash of 2008
Same portfolio during the year from 2009-2017 increased by 175.91% which is at the compounding rate of 7.5%.
Based on the above data, investors can decide how much risk they want to take and diversified their portfolio. Above strategies can be used for passive management and still meet your life goals.
Disclosure: I am/we don't hold any position in IWM, TLT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.