If You Could Have a Do-Over, Which Path Would You Choose?

July 14, 2010

Considering the brutal market we have been through the last decade, which of the following two paths would you choose if you could go back to January 1990 and start over?

A) $5,000 lump sum in Vanguard’s 500 Index Fund and $5,000 lump sum in Vanguard’s Total Bond Index Fund


B) $10,000 lump sum invested Vanguard’s 500 Index Fund

If you chose A, and reinvested all dividends, your account value at the beginning of July would have been $35,125.

If you chose B, your account value would have been $50,743 (again, assuming all dividends were reinvested).

Now, the picture changes drastically if the beginning period is January 2000. The 50/50 portfolio would have grown to $12,278 while the 100% stock portfolio would have been worth $9,418.

What’s the point?

First off, hindsight is 20/20. Second, diversification is insurance. It looks like expensive insurance when the stock market performs well and it makes you look like a genius when times are tough (like the last decade). I realize a 50/50 portfolio is pretty conservative. In a future post, I’ll look at other portfolio weightings.

2 responses to If You Could Have a Do-Over, Which Path Would You Choose?

  1. You forgot to point out that in three of the four scenarios, dollar-cost averaging beat a lump sum investment. That is the most interesting thing to me, since it’s pretty rare that people wind up with a huge lump sum for investing.

  2. Indeed, Courtney. Most of us “invest” through 401(k) plans and IRAs. That means dollar-cost-averaging.

    It is my contention that the forcing function in stock prices is company earnings. Everything else is noise on that signal. Greater volatility increases the performance of DCA investing. Since I will not be retiring for another 20 years, at least, and I intend to be retired a VERY long time, I do not concern myself with short-term fluctuations. And in my time-scale, a decade is “short-term.”