For years, you've heard about how stocks have historically provided investors with annual returns averaging 10% over time. As you might imagine, the lousy returns we've seen for the past year and a half have made those historical numbers, well, history.
But if you're still bound and determined to milk 10% out of your portfolio year in and year out, there's still a way. You just have to be a little more creative about it.
The bad news
In his newsletter's latest update for subscribers, Rule Your Retirement lead advisor Robert Brokamp points to investment results published in a recent investing book, The Ivy Portfolio. Looking at five different types of investments -- U.S. stocks, international stocks, real estate investment trusts, commodities, and 10-year Treasury notes -- and tracking their performance over the 25 years from 1973 to 2008, the news is sobering: All five asset classes had average returns in a tight range between 8.54% for REITs and 9.26% for domestic stocks.
That seems to put 10% out of reach for most investors. Interestingly, though, you could get to within a hair's-breadth of 10% -- 9.79% -- with a simple strategy that uses only those investments. Moreover, the result not only produces better returns, but also gives you a smoother ride along the way.
Mixing it up
We've long recommended building a diversified portfolio that includes investments from a wide variety of different asset classes. By spreading your risk across many different types of investments, you'll often find that when certain stocks fall, others rise to offset those losses, or even provide overall gains.
For instance, consider what happened during 2007 and the first half of 2008. Financial stocks such as US Bancorp
Of course, we've seen much different results since the second half of 2008. Pretty much every general asset class has lost significant ground, which has contributed to the big drops in the 25-year averages compared to the same figures for 1982 to 2007. Diversification hasn't helped investors much in the past nine months.
Keeping your balance
That's where the other component of a successful long-term asset allocation strategy comes in: rebalancing. By making sure your asset allocations don't get too far out of whack, you also ensure that you won't leave yourself overexposed to a falling market.
To see how important that is, take a simple example. Say that three years ago, you wanted to invest $1,000 in three different sectors: technology, retail, and commodities. As representative stocks, you picked IBM
|
Company |
Value in 2007 |
Value in 2008 |
Value Today |
|---|---|---|---|
|
Without rebalancing |
$4,380 |
$9,616 |
$5,530 |
|
With rebalancing |
$4,380 |
$8,332 |
$6,119 |
Source: Yahoo! Finance. Values as of April 17 for each year.
You'll notice that a rebalancing strategy didn't look too smart last year, since selling some of the best performers in 2006-07 proved premature. But being overweight in PotashCorp cost investors a 42.5% loss between last April and today, versus just a 26.5% drop for the rebalanced portfolio.
Learn more
As it turns out, those two factors -- diversification and rebalancing -- pushed a mix of all five asset classes to perform better than any of the five alone. But there's more to the story, as Robert's update describes in more detail.
The full scoop is available to Rule Your Retirement subscribers. But if you haven't subscribed yet, don't worry -- it's easy to join the ranks of thousands of people who've improved their chances of having a healthy retirement. We'll even make it easier for you with a free 30-day trial to get started.
The bear market has thrown a lot of long-held notions out of favor. But even if you can't count on a 10% average return on stocks, you can still get the best results possible from your portfolio.
More on investing for a happy retirement:
- You won't ruin your retirement if you do this.
- 3 investment myths you can't afford to follow.
- Your best bet for a recovery.
