By Paul A. Merriman
There are plenty of choices and they don’t have to be difficult
Sometimes I’m accused of offering investors too many choices for the stock portion of their portfolios. Some authors stick to just one plan that they maintain is adequate for almost everyone.
Personally, I don’t believe one size fits everybody. Nor do I believe choosing a stock portfolio should be overly difficult.
In this installment in a series of Investor Boot Camp 2025. I’ll offer you several worthwhile alternatives for your stock funds, everything from very simple to overly complex. And then I’ll help you choose.
I want to back up for a moment and reiterate something I emphasized in a previous Boot Camp 2025 installment: Whatever else you do, be sure and manage your risk by choosing an appropriate mix of stock funds and bond funds.
Think of bond funds as the brakes on a vehicle. They help keep you out of trouble. Stock funds are like the engine. They get you going. They keep you going. They determine how fast and how far you’ll go.
The most basic equity portfolio is super simple, comfortable and convenient: the S&P 500 SPX. This bundle of the largest publicly traded U.S. companies is widely and inexpensively available through index funds that do all the work for you.
If you don’t want to think much about your investment choices, this can be a good choice. Your portfolio’s ups and downs will follow what you might hear or read in the news, and your results will be in the mainstream.
If you invested $10,000 in this index at the start of 1970 and reinvested all dividends and capital gains, that $10,000 would have been worth $2.99 million by the end of 2024.
But those gains didn’t happen in a straight line. As you can see in the table below, some periods were much more favorable than others. And in the first decade of this century, the index let investors down in a big way.
Is this index enough by itself? Maybe. But there are many ways to do better.
At the opposite end of the spectrum, you could have built a 10-fund portfolio with massive worldwide diversification. This is what I have referred to in many past articles as the Ultimate Buy and Hold Strategy. With that, you would have made a lot more money over those 55 years: $4.79 million instead of the $2.99 million from the S&P 500.
All that diversification led to higher long-term returns and reduced the volatility of being in just the S&P 500.
And yet, it required investors to choose and manage 10 individual funds. That would have been particularly annoying for those who realized they could have achieved (at least in this period) somewhat better results from only four funds.
The worldwide four-fund portfolio is an international powerhouse combining large and small, growth and value, U.S. and international. It hat grew to $5.22 million. Alternatively, the U.S. four-fund portfolio stayed within the U.S. and grew to $5.58 million.
Each of those three strategies is weighted toward value stocks, while still including the S&P 500.
Do you want even higher returns? For that, we offer a five-fund worldwide all-value portfolio and a two-fund U.S. version.
From 1970 through 2024, $10,000 would have grown to $6.8 million in the former or to $8.25 million in the latter.
Some aggressive investors may want to go even further, putting all their equities into small-cap value stocks, either worldwide or just in the U.S. From 1970 through 2024, $10,000 would have grown to either $11.8 million (worldwide) or $11.27 million (U.S.).
There’s one more combination we track, composed of equal parts of the S&P 500 and a U.S. small-cap value fund.
This two-fund combo would have grown to $6.46 million from 1970 through 2024, more than doubling the growth of the S&P 500 alone.
Now, take a deep breath and relax while we wrap things up.
Of all the data here, the following may be the most important: From 2000 through 2009, the S&P 500 by itself had a 10-year compound loss. Every other strategy did much better in that decade, making it more likely that investors would stick with their plans.
This drawback of the S&P 500 was especially challenging for the many thousands of new retirees in 2000 or shortly afterward, many of whom were quite confident they could count on the S&P 500. After all, that index had compounded at more than 17% over the previous quarter-century.
Perhaps the most critical test for any investor is this: If you bail out when things are tough, you’ll never get the premium reward for the risk you have taken.
So what’s the answer?
In my view, most investors would have done quite well over these 55 years with their equities in either the U.S. four-fund strategy or the U.S. two-fund strategy. I believe that is likely to be the case in the future as well.
Either of these options will give you meaningful diversification while keeping either 25% or 50% of your equities in the comfortable and familiar S&P 500 index.
For more data on all these options, here’s a table that includes information on best periods, worst periods and three measures of statistical risk.
I’ve also recorded a podcast and a video to go with this article.
Richard Buck contributed to this article.
Paul Merriman and Richard Buck are the authors of “We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement.”
-Paul A. Merriman
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