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Investing – A Look at the Numbers

By JLP | April 11, 2006

I was looking at The Callan Periodic Table of Investment Returns (pdf). If you haven’t looked at it yet, you really should check it out. I took their numbers and applied them to a portfolio that invests equal amounts in each class and rebalances annually. Over the last 20 years (it is hard to believe that 1986 was 20 years ago!), a portfolio with a starting value of $100,000 would have grown to $786,417 (not accounting for expenses). That is an annualized rate of return of over 10.86%. That’s not too shabby considering 12.5% of the portfolio was invested in bonds and 2001-2002 were horrible years.

If you want, you can download the table* I put together and play with the numbers yourself. When you open the spreadsheet, you will see a series of years. Under each year is 4 columns. The first column is the title of the asset class. The second column represents the return of that class for that year. The third column is the percentage of the portfolio dedicated to that asset class. Column four is the weighted return for that asset class (column 2 X column 3 = column 4). The portfolio return for any given year is the sum of the weighted returns (column 4).

So, what’s the point of all this? Well, for one, it is stupid to try to time the market. Sure, you may get lucky and pull it off a time or two. However, looking at the Callan Table suggests that there is no pattern to be found. So, the best thing to do is use the volatility to your advantage by investing equal amounts in each class and rebalance them annually. Rebalancing annually keeps you disciplined and makes you sell “overpriced” classes and use the proceeds to buy “underpriced” classes.

Bottom line: Investing is easy. Don’t make it harder than it has to be.

*This is a 2003 Excel file. Download at your own risk. Sorry, I can’t offer support.

Topics: Asset Allocation, Index Funds, Investing | 5 Comments »


5 Responses to “Investing – A Look at the Numbers”

  1. The Million Dollar Portfolio Says:
    April 11th, 2006 at 7:20 pm

    An interesting idea, and certainly a good one for those who don’t want to actively manage and educate themselves about investing and their personal portfolios.

    However, for those who do wish to take the time, I think Warren Buffett would disagree with you about diversifying into all of these different asset classes. There are plenty of fund managers who can disprove this theory.

    Take for example VGHCX, the Vanguard Health Care Fund, which has returns close to 20% for the past 20 years.

    Thanks for the information about the The Callan Periodic Table of Investment Returns, and your EXCEL spreadsheet as well. This is truly fascinating stuff.

    http://www.themilliondollarportfolio.com

  2. fivecentnickel.com Says:
    April 16th, 2006 at 9:10 pm

    Carnival of Personal Finance #44

    Good morning, and welcome to the 44th edition of the Carnival of Personal Finance. Coming on the heels of two somewhat ‘elitist’ Carnivals, I’ve decided to return the Carnival to it’s inclusive roots. If an on-topic post was sub…

  3. The Dividend Guy Blog » Blog Archive » Carnival of Personal Finance #44 Says:
    April 17th, 2006 at 9:14 pm

    [...] I also liked AllFinancialMatter’s article on Investing – A Look at the Numbers. Timing the market does not work – being consistent and following a dedicated plan is what wins out in the end. Explore posts in the same categories: Heads Up [...]

  4. Punny Money Says:
    April 18th, 2006 at 6:06 am

    [...] JLP, the world famous writer of AllFinancialMatters, writes this week letting us know that index investing and frugality go hand-in-hand. He also talks about the The Callan Periodic Table of Investment Returns, a big and scary chart with a simple message about how easy investing really is. So, the best thing to do is use the volatility to your advantage by investing equal amounts in each class and rebalance them annually. Rebalancing annually keeps you disciplined and makes you sell “overpriced” classes and use the proceeds to buy “underpriced” classes. [...]

  5. chrisatunited.com » Blog Archive » The Periodic Table of Investment Returns Says:
    July 27th, 2006 at 8:14 am

    [...] Regarding it, I agree with AllThingsFinancial, the blogger here. Judging by this, it would be foolish to try and time the market. Just move your money around. CN [...]

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