Preretirement Accumulation Portfolio
The annual returns of each asset from 1970-2007 are provided in Figure 3, as well as the results for an accumulation portfolio that includes all seven assets (equally weighted and annually rebalanced to maintain the equal weighting). Data in red parentheses represent negative returns. The primary data source for this study was Morningstar Principia. Raw data were also obtained from "Stocks, Bonds, Bills, Inflation"; by Ibbotson Associates.
Also shown in Figure 3 is the 38-year average annualized return for each individual asset, as well as the standard deviation of annual returns, the number of years with a negative one-year return, the worst one-year return and the worst three-year cumulative percentage return. All these figures assume a buy-and-hold investment. The period in which the worst three-year cumulative return occurred is shaded in yellow.
The equally weighted seven-asset portfolio (EW) generated performance that was comparable (or better) than the individual equity assets but with return volatility (standard deviation) only slightly higher than bonds. Its worst single-year loss was -5.34 percent compared with losses of over -20 percent for each of the individual equity assets. Impressively, the EW portfolio never had a three-year period with negative cumulative return.
Three additional portfolios are contrasted against the EW portfolio in Figure 4: a 60 percent equity/40 percent fixed-income moderate allocation portfolio, a custom-weighted seven-asset portfolio (CW) and a 40 percent equity/60 percent fixed-income conservative allocation portfolio. The 60/40 portfolio is typical among "moderate allocation"; funds, such as Vanguard Wellington or Dodge & Cox Balanced. The 40/60 portfolio is a common asset allocation model among "conservative allocation"; funds, such as Vanguard Wellesley Income or Franklin Income. The EW portfolio had an aggregate allocation of 42 percent equities, 29 percent fixed income and 29 percent in "alternative"; or diversifying equitylike assets. The CW portfolio allocation was 12 percent large U.S. equities, 8 percent small U.S. equities, 10 percent non-U.S. equities, 40 percent bonds, 20 percent cash, 5 percent REITs and 5 percent commodities.