Interesting Ways to Look at Return and Volatility 1991 – 2011

March 26, 2012

How’s that for a catchy title?

I have monthly total returns for the S&P 500 (S&P 90 prior to February 1957) going all the way back to January 1926. However, I only have the Barclay’s Aggregate Bond Index (formerly known as the Lehman Aggregate Bond Index) going back to January 1991.


I thought it would be interesting to look at different portfolio allocations and see how they would have performed from 1991 through 2011. I assumed a beginng balance of $100,000 and annual rebalancing at the end of each year. I started out with 100% stocks and no bonds and then decreased the stock allocation by 5% while increasing the bond allocation 5% until I got to 100% bonds. You can download a PDF of my findings here: S&P with Bonds (1991 – 2011).

What I found interesting was the portfolio that brought the biggest balance at the end of 2011 was the 95% stocks/5% bonds. Not only that, it delivered a better return with slightly less volatility—as measured by the monthly standard deviation.

Another interesting finding was how well the 70% stocks/30% bonds portfolio did. Take a look at the charts for the 100% stock portfolio and the 70/30 portfolio:

As you can tell from the charts, the 70/30 had significantly less volatility than the 100% stock portfolio. It captured 97% of the all stock allocation but only experienced 70% of volatility* (again, measured by monthly standard deviation). It seems like a reasonable trade-off to me.

But, that’s not the only way to look at it.

Another way to look at it is to look at potential retirement income. For instance, let’s say you want to withdraw 4% of your account balance upon retirement. Here are the different income amounts based on the ending values of the portfolios:

It’s important to note that past returns aren’t predictors of future results. That’s something to keep in mind when deciding on how to allocate your portfolio. I tend to be more on the aggressive side with our retirement portfolio but these findings are making me rethink my strategy. That said, I can accept more volatility now for hopefully higher income at retirement.


*To arrive at that number, I simply divided the monthly standard deviation for the 70/30 portfolio by the standard deviation for the 100% stock portfolio.

6 responses to Interesting Ways to Look at Return and Volatility 1991 – 2011

  1. Interesting, but that is not how most of us invest. We invest through bi-weekly or di-monthly contributions to 401(k) plans.

    Can you perform the calculations assuming monthly equal-dollar contributions?

  2. Jack,

    That’s next on my list. I’m also going to look at it based on the maximum social security contributions to see how a person would have done on their own rather than through social security.

  3. Comparing the 100 and the 70/30 graphs, you can see there were times where the 100 simulation was up $150k over the 70/30 graph.

    The 70/30 simulation made up ground during the recent recession.

  4. I appreciate you doing these kinds of analyses. It gives me a different perspective sometimes.

  5. I too did similar analysis back in 2006. The numbers looked good and the my timely back then was awful.

    Your analysis sounds like mine back then. Since then, I have done other lines an found that timing is critical to long term success.

    For example: Invest $1000 in the stock market (DJIA)in June 1928 and you will not recoup your investment until 1968 when taking inflation into account. Whereas, an investment of $1000 in the DJIA in June 1933 and can retire in 20 years in comfort (sorry it will not making you a millionaire).

    Same is true today. Invest $10K in 2007 and take a bath. Invest $10K close to the bottom in Feb-Mar 2009 and you would have doubled your investment by today.

    The lesson learned: You cannot use past performance of stocks and bonds to predict long term future outcomes. Short term outcomes are even harder still…

    Building a retirement portfolio on real investment opportunities require insight, timing, serious research and a touch of luck.