Let Money Magazine fix your portfolio?

Money Magazine has some new pie charts in their February issue and, since these images have been few and far between since the stock market meltdown last fall, it seemed like a good idea to have a close look at their latest offerings.

Recall that, in The losses of a Money Magazine portfolio last week, an August 2008 recommendation was examined and found wanting in historical performance - it had produced a cumulative gain of just four percent over a period of eight years with things looking only marginally better depending on which year in the current decade you began.

Well, the latest pie charts are a little better, but not much.

In Fix your portfolio, the staff at CNN/Money offer three new pie charts and "advice on how to craft an asset allocation that will best position you to make up your losses".

Hmm... make up those losses - let's have a look.

The first offering labeled Scenario 1 comes under the heading, "YOU DID IT RIGHT", a characterization that, more than anything else, speaks to the fact that conventional wisdom is often wrong.

"Doing it right" in the current decade would have you invested exclusively in mutual funds from Vanguard in the traditional mix of about 60 percent stocks and 40 percent bonds with a REIT fund thrown in for good measure.

Over the last eight years, you would have had an average annual return of 3.5 percent with a cumulative gain of 23 percent which works out to a very "money market-like" 2.7 percent average return after accounting for compounding.

As shown below, a starting portfolio value of 100 would have climbed to almost 160 at the end of 2007, only to plunge 22 percent in 2008.
One could argue that, starting at different times during the decade would have produced a different result and, while that would be true, it also wouldn't make a big difference.

Anyone able to summon the courage to invest at the depths of the last stock market bottom, as 2002 was changing into 2003, would now be the proud owner of a 38 percent gain and a 6.3 percent average annual return.
Beginning anytime later would have produced a less desirable result, both the total return and average return getting worse during each of the last five years.

ooo

For the more speculative investors in the Money Magazine readership, there is Scenario 2 which pushes the equities weighting from 55 percent to 70 percent through the addition of small cap U.S. stocks and more foreign stocks.

This sort of approach is intended for those who are willing to "take some risk in the pursuit of market-beating returns" and that was indeed the case.

Unfortunately, the results you would be looking at today are highly dependent upon when the investments were made, there being only a tiny window to "beat the market", but a much bigger window to "lose to the market".

Going back to an initial investment on January 1st, 2001, Scenario 2 bests Scenario 1 by 13 percentage points - cumulative gains of 36 percent versus 23 percent.

While, at first glance, a 36 percent return may look good, over a period of eight years, that works out to be the equivalent of one of those stable value funds you find in your 401k, the ones thta earn about four percent, year after year.

As shown below, Scenario 2's gain of almost 100 percent at the end of 2007 turned into something much, much less after the steep fall in 2008.
Here's where the timing gets difficult. An average return of more than eight percent over seven years could have been achieved by waiting one year to invest in early 2002 and waiting another year would have produced something akin to those "historical stock market averages" we've all heard so much about - an average return of 8.1 percent.

However, those who waited any longer, as we are all sometimes wont to do in order to assure ourselves that the bottom really is in the rear view mirror, would have experienced less desirable results.
Those waiting until 2005 to commit to this approach would not have made any money at all, and then it's all negative numbers from there on out.

Scenario 3 is about a 50-50 mix of stocks and bonds and, while my curiosity was piqued, wondering how it might look up against Scenarios 1 and 2, that will have to wait for another day.

The moral of the story?

After the damage of 2008, about the only way you could have made money in this decade with asset allocations advocated by the nation's number one personal finance magazine is if you invested at the bottom of the last bear market in late-2002/early-2003.

Given the aversion to stocks at the present time by your typical retail investor, it is unlikely that very many readers made such a commitment earlier in the decade.

ooo