I’m going to reveal how much money you should have made in your investments.
That’s right. No excuses.
It’s time to compare.
But before we do, let me dig up some childhood trauma.
No, I’m not (yet) talking about wetting your pants.
I’m talking about dead white poets from the 1700s. You hoped to be done with them when you left school.
But I brought one back.
In Alexander Pope’s, An Essay on Criticism, he wrote:
A little learning is a dangerous thing
Drink deep, or taste not the Pierian spring
There shallow draughts intoxicate the brain,
And drinking largely sobers us again.
Here’s how our teachers should have translated this.
In Greek mythology, the Pierian spring is the fountain of knowledge. We shouldn’t drink from it, unless we’re going to binge. After all, if we drink a little, and then wander away, we’ll think as clearly as drunken chickens.
It was brilliant of Mr. Pope to pen this for investors.
We’ll see how this relates by first looking at the gains of indexed investment allocations.
Here are the 12 month returns ending September 30, 2024, measured in USD.
+26.16%: 100% US stocks
+22.89%. 100% Global stocks
+19.79%: 80% Global stocks, 20% Global bonds
+14.50%: 70% Global stocks, 30% Global bonds
+13.62%: 60% Global stocks, 40% Global bonds
Investing 100 percent in US stocks or Global stocks saw the best returns.
If you aren’t invested that way, you might be tempted to make a switch. And that might be right for you. But first, Alexander Pope would say, “Guzzle from that spring.”
If you invest 100 percent in stocks, you're running across a tightrope that hangs 5 feet above the grass. When you fall, it won’t kill you. But it could hurt.
Investing 70 percent in global stocks and 30 percent in global bonds (to name a balanced example) is like running that rope with chunky knee and elbow pads. They slow things down. But when stocks fall (or you fall off the rope) it shouldn’t hurt as much.
Some years, balanced portfolios of stocks and bonds beat portfolios of 100 percent stocks. Such years included 2000, 2001, 2002, 2008, 2018 and (by the skin of their teeth) 2022.
But over long periods of time, portfolios comprising 100 percent stocks beat portfolios comprising stocks and bonds.
So, if you shun bonds, could you afford a bigger retirement boat?
Ten years ago, I would have nodded like a dolphin performing for his lunch. I saw the data, which I’ll share with you as well. But I have a different answer now: “It depends.”
How a portfolio performs and how you perform with that portfolio are often two different things.
Portfolios with 100 percent in stocks jump around a lot.
During rough patches, too many investors really do wet the bed. When their portfolios plunge, they often change their allocations, sell what they own, or cease to add fresh money. They feel better after prices rise, so they add more money then.
That final line is worth repeating:
Investors feel better after prices rise, so they add more money then.
Adding less money during declines, and more when stocks rise is like poking a Grizzly and then running away. It isn’t very smart.
But on average, investors in more volatile portfolios run more from bears. As a result investors in balanced portfolios often beat those with 100 percent in stocks.
For example, Morningstar is a fund rating agency that publishes the performance of different funds. They also estimate how much the average investor earned in each of those funds. They do this by tracking the flow of money in and out.
If people were rational, a fund averaging 8 percent would see its investors average 8 percent. But people aren’t machines. We have emotions.
In my books Balance and Millionaire Expat, I referenced a 15-year period when Vanguard’s S&P 500 index of US stocks averaged 8.14 percent. Over those same 15 years, I noted returns for Vanguard’s balanced funds of stocks and bonds. The balanced funds earned lower returns than Vanguard’s S&P 500 index.
That’s not surprising.
What is surprising, however, is that over that 15-year period, investors in the balanced funds (stocks and bonds) earned higher returns than investors in the S&P 500 index (100 percent stocks).
On average, fewer balanced investors tried to outrun bears.
The past 10 years were less volatile for the markets, compared to the 15 years I measured.
US stocks saw only two down years between 2014 and 2024.
And they weren’t in succession.
So, the bad-behaviour gaps narrowed.
But they still existed.
According to Morningstar, investors in balanced funds behaved the best. They always do. And investors in the most volatile funds (sector equity funds) behaved the worst.
They underperformed the funds they owned by an average of 3.9 percent per year.
And those same people believed they could handle short-term risk.
Shallow draughts, as Pope said, “intoxicate the brain.”
The truth is most humans can’t handle volatility. We wet our pants and run from Grizzlies.
So, if you have a high stock allocation, will you sabotage yourself?
You can only find that answer, if you search deep within.
Compound Annual Average Returns
Performance And Allocations
Ending September 30, 2024
| Allocation | 1 year | 3 years | 5 years | 10 years | 15 years | 20 years | 25 years | 30 years |
| 100% US stocks | +26.16% | +8.08% | +15.18% |
+12.31% |
+13.89% | +10.61% | +8.21% | +10.48% |
| 100% global stocks | +22.84% | +5.62% | +11.99% | +8.89% | +10.17% | +8.64% | +6.71% | +7.99% |
| 80% global stocks, 20% global bonds | +19.76% | +3.64% | +9.43% | +7.16% | +8.64% | +7.67% | +6.44% | +7.68% |
| 70% global stocks, 30% global bonds | +14.5% | +2.64% | +8.14% | +6.28% | +7.70% | +7.06% | +6.19% | +7.37% |
| 60% global stocks, 40% global bonds | +13.62% | +1.80% | +7.0% | +5.55% | +7.0% | +6.57% | +6.01% | 7.19% |
Source: portfoliovisualizer.com
Note: Even if you owned market-cap weighted index funds that matched one of these allocations, your results will differ based on when you added money. The returns, above, measure investments made with no money added. For example, as noted above, over the 3 years ending September 30, 2024, a portfolio comprising 60% global stocks and 40% global bonds would have averaged 1.80% per year if no money were added to it. But if someone opened their portfolio September 30, 2021 with $100,000, and if they added a consistent $10,000 a month, they would have taken advantage of the market’s discount in 2022. By September 2024, they would have $501,248. That’s a compound annual money-weighted return of 12.82%. This emphasizes the importance of regularly adding money…and continuing to do so, especially, during market declines. Having said this, research also shows that if you have a lump sum, the best odds of success comes from investing as soon as you have the money. Continuing to add regular sums after that (I recommend doing so monthly) will further compound your future wealth.
Andrew Hallam is the best-selling author of Millionaire Expat (3rd edition), Balance, and Millionaire Teacher.
