The following is a chart that I usually like to pull out during a crisis when people are scared of investing in the stock market, but since I just found a nicely updated version of it, I had to share. It is taken from Jeremy Siegel’s book Stocks for the Long Run and found via this Vox article about how most people incorrectly view real estate as the best long-term investment*.

Here is a chart showing the historical range of real (after-inflation) returns for US stocks, long-term bonds (bonds), and short-term bonds (T-bills) from 1802 to 2012.

The chart shows that over bried time periods, the stock market has been historically more of coin flip than anything else. Over a year, you could get anywhere from +70% to -40%. With bonds and cash, the swings are much less wild. But as you lengthen your holding period, your risk of losing money over that time decreases significantly. For time horizons of 20 and 30 years, only stocks never lost you money after inflation.

Note that the average annual returns for each respective asset class remains the same across all time periods. Via the CFA Institute:

This supports the advice that it doesn’t really matter as much what your plan is, but more that you pick one and stick with it. Going heavy on stocks and then bailing out when they are in a funk, or going heavy on bonds and bailing out when they are in a funk, all that is worse than doing NOTHING and simply riding it out. As they say, it’s not about timing the market, it’s about time IN the market.

I believe it was one of William Bernstein’s books that suggested that young folks who understand this should put as much money now into stocks as possible, as to increase your time horizon. Put 100% of your money into stocks now, and then as you get older put more of your money into bonds to get a balanced mix eventually. This can be hard though, as you’re asking the people with less experience and smallest assets to hold the thing that is most volatile. Going 80/20 or 70/30 from beginning to end is also a reasonable approach in my opinion (and personal experience with my own portfolio).

Now, another well-known professor Robert Shiller reminds us that the period above includes the most economically successful century of the most economically successful country in the world so far… and will not necessarily repeat itself. I’m not saying that you should expect 6% real returns from stocks. Shiller’s CAPE ratio model itself forecasts a 3% real return for stocks over the next decade. I’m focusing on the fact that stocks are investments in productive businesses and that the volatility of the pricing of such businesses will stabilize when held across longer holding periods.

* I would actually argue that the long-term return of real estate is actually not that far behind that of stocks, if you add in the imputed rent from the house. Yes, it may be true that the value of a house doesn’t increase that much over inflation over the long run. But houses are also productive in that they can create their own income! If the value of the rent that you could get from that house is included, that could add another 4% to 6% to the return historically. 5% real return would be smack dab between bonds and stocks.

Via The Reformed Broker, investment manager Research Affiliates shares how a simple, balanced 60/40 portfolio (specifically 60% S&P 500 stocks, 40% 10-Year US Treasuries) did pretty darn good in the past 100, 50, and 25 years:

It even did well over the last 10 years, considering that “blip” we had in 2008. The 60/40 portfolio outperformed 9 of 16 core asset classes, all while maintaining lower-than-average volatility.

Of course, they also predict (using sound reasoning, in my opinion) that the same 60/40 portfolio will only produce a 1.2% inflation-adjusted return for the next 10 years. Still, I don’t know of any better options.

Every year, investment consultant firm Callan Associates updates a neat visual representation of the relative performance of 8 major asset classes over the last 20 years. You can find the most recent one below (view as PDF), which covers 1995 to 2014. For each year, the best performing asset class is listed at the top, and it sorts downward until you have the worst performing asset. You can find previous versions here.

The Callan Periodic Table of Investment Returns conveys the strong case for diversification across asset classes (stocks vs. bonds), investment styles (growth vs. value), capitalizations (large vs. small), and equity markets (U.S. vs. international). The Table highlights the uncertainty inherent in all capital markets. Rankings change every year. Also noteworthy is the difference between absolute and relative performance, as returns for the top-performing asset class span a wide range over the past 20 years.

I like focusing on a specific color (asset class) and then visually noting how its relative performance has bounced around for a few years. The ones that enjoy a stint at the very top are usually found on the bottom eventually.

So instead of trying to predict one asset class that will outperform this year, why not commit to holding a multiple, productive asset classes that will balance each other out over time. Pick ones that will have a long-term positive return, but in any given year might perform poorly. Hold them in a low-cost manner, and rebalance your holdings if they get out of whack.

I don’t always check my portfolio performance, but when I do, I do it at the end of the year. Here are the trailing 1-year returns for select asset classes as benchmarked by passive mutual funds and ETFs. Return data was taken from Morningstar after market close 12/29/14.

Stocks. The Total US Stock Market (VTI) went up nearly 15%, while the rest of the world’s markets (VXUS) dropped around 3%. Europe specifically struggled, and Emerging Markets (VWO) only eeked up 1.5% total return. US REITs (VNQ) went on a tear, up 32%.

Bonds. The Total US Bond Market (BND) went up ~6%, even though most market pundits thought rates would go up in 2013. Short-Term Treasuries (SHY) were mostly unchanged, while Long-Term Treasuries (TLT) shot up 27%. Inflation-linked TIPS (TIP) inched up 3%.

Gold (GLD) had its gyrations but ended the year with very little change, down ~3% over the past year.

In the end, nothing really went down that much and a few things did really well. It was another year where half of the predictions were wrong, and new predictions will no doubt sprout up soon. Business Insider has a hilarious post on completely meaningless market phrases that sound smart. On that note, my official position will be “cautiously optimistic” for 2015.

The overall asset allocation of my personal portfolio hasn’t changed much since my October 2014 update, but I’ll probably do a final update once the year is officially over. Some quick calculator work indicates the overall 2014 return to be roughly 7%.

Here is an interesting chart comparing the correlation of various asset classes to the S&P 500 over the last 5 years. Chart is from Richard Bernstein Advisors, found via The Reformed Broker.

A negative correlation between two asset classes means that they tend to move in opposite directions. While long-term US Treasury bonds have been the most strongly uncorrelated, it is also worth noting that intermediate-term US Treasuries (5-7 years) were nearly as uncorrelated. Of course, this is the past and correlations can and will change.

Still, this would seem like good news for people who hold a “total” bond fund like the Vanguard Total Bond Market Index Fund (VBMFX, BND) or iShares Barclays Aggregate Bond Fund (AGG) as these contain ~70% US government bonds and have an intermediate average maturity. You want your bonds to serve as a hedge against stock movements, and they did over the past 5 years while still maintaining positive returns (~4% annualized for AGG, ~15% annualized for S&P 500).

(Updated. Lending Club ended their first day of trading at $23.43 a share, up 57% from their IPO price. With roughly 361 million outstanding shares, LC is roughly a $8.5 billion dollar company! I have updated the post to include the rest of the IPO documents and process. I ended up selling my 100 shares for roughly a $800 gain during the first day of trading. Details and rationale below.)

LendingClub connects individual borrowers with individual lenders, and I’ve been writing about them since 2007. They successfully had their IPO on Thursday, December 11th, 2014 and they actually set aside a few shares for individual investors. Usually you’d either need serious cash or insider access. If you were an investor at LC by 9/30/14 you should have gotten an e-mail asking if you were interested.

I participated in this IPO for a few reasons:

• I’ve been a lender on LendingClub since 2007 and have been following their progress since.
• I have never participated in an IPO before, and am curious about the process.
• I view this investment as purely speculative. It is not an investment, it is a gamble!
• I can commit as little as $250 and up to about $5,000 (details below). I can choose a number that will keep my interest but it won’t break the bank either way.

I’ve documented the process below:

11/17/2014. I got an e-mail with the subject “Lending Club IPO – Directed Share Program (DSP)” telling me that I was eligible to participate and that I had to opt-in to sharing my information with Fidelity Investments. Here is a screenshot:

I clicked, and then was instructed to wait. (More below)

[Read more…]

Whenever Vanguard founder Jack Bogle speaks, I listen. He has spent more time thinking about how to help the average investor than I have been alive. I found this recent Bloomberg interview covered a lot of topics regarding portfolio construction. Here are my notes, I have paraphrased what is not in quotes:

• “The best thing you can do for yourself is to make your choice [of a long-term strategy], keep it simple and stick with it.”
• The traditional 60/40* balanced fund is still a fine, simple choice for a portfolio. He prefers that over a target-date fund. (*60% stocks, 40% bonds)
• For the stocks portion, a traditional total US stock market fund is fine. You can add a little international stock exposure, but you don’t need it. The long-term returns for foreign companies will likely be similar but with increased currency risk.
• For the bond portion, a traditional total bond fund is fine. Higher yield won’t come without higher risks.
• Even if valuations are currently high on a relative basis, you should take the long-term view and invest now.
• “Financial planners and advisers need to sell their value as keeping their clients from doing the wrong thing at the wrong time.” That is their value-add, and it can be significant.

Keep in mind these are Bogle’s opinions and not necessarily my own.