Why bother diversified? Why not all in Index SP500?

[FREE866]

Quote:

Originally Posted by target2019 A more realistic view comes from https://www.officialdata.org/us/stoc...0&endYear=2022 Take a look at the monthly returns 1950-2022. I experience the red drawdowns.

Confused by your comment. You also experience the blue increases no?

[VanWinkle]

Quote:

Originally Posted by target2019 A more realistic view comes from https://www.officialdata.org/us/stoc...0&endYear=2022 Take a look at the monthly returns 1950-2022. I experience the red drawdowns.

Fun tool, thanks for sharing!!

VW

[FREE866]

Quote:

Originally Posted by VanWinkle Fun tool, thanks for sharing!! VW

I shared it first


and yes, love it....totally cuts through the noise with hard data....shows the power of the stock market compounding ...amazing!

[target2019]

Quote:

Originally Posted by FREE866 Confused by your comment. You also experience the blue increases no?

I experience the blue, but remember the red.

We're many different types of investors (aka people). You've chosen to make a point by focusing on 10-year periods. I measure monthly and live that.

Those red bars are more numerous than one would imagine if only 10-year averages are plotted. That was my point.

There's something more to averages, of course, I'm not denying that.

[FREE866]

Quote:

Originally Posted by target2019 I experience the blue, but remember the red. We're many different types of investors (aka people). You've chosen to make a point by focusing on 10-year periods. I measure monthly and live that. Those red bars are more numerous than one would imagine if only 10-year averages are plotted. That was my point. There's something more to averages, of course, I'm not denying that.

Fair point.


Daily , monthly and yearly drawdowns feel more for sure, but barring something cataclysmic happening the future will most likely resemble something close to the past. No guarantees of course. Someone mentioned goals and for me if we even get 50% of past markets returns I'm good. So I think mentally I just try to focus on that as opposed to drowning in the angst of the volatility.

[pb4uski]

Quote:

Originally Posted by FREE866 Couple things... For the posters that are so overfunded to the point that 100% fixed income can carry them for decades they basically have monopoly money and what the market does is pretty much irrelevant . Any retirement calculator shows that as 100% fixed income success rates are very low unless the beginning balance is very high. Lets at least keep the convo focused on those that want or need growth. Again, looking at history , post 1930s there has been very very rare occurrences where stocks were down over a 10 year period. The probabilities are they will come much closer the long term average of 10% heres a calculator that shows that: https://www.officialdata.org/us/stoc...0&endYear=2022 re PE ratios....PE ratios have long shown they are NOT predictive....even Robert Shiller himself, is on record saying that. If it were only that simple! Perfect example was the PE back in 2009..it was like 60....looking back, was that a good time to invest? again...PE is ONE metric

Well, to begin with, the topic of the thread is supposed to be whether one's equity allocation could be 100% S&P 500 index rather than a more diversified equity portfolio so your comment on playing it safe was a bit in left field to begin with. I'm not sure where the idea that an investing strategy for those who want or need growth came from.

Second, Warren Buffet's advice to his heirs was to simply invest in the S&P 500 index, so that pretty much answers the OP's question.

Quote:

Here's the quote, from page 20 of his most recent annual letter to Berkshire shareholders, dated Feb. 28. After all of his Berkshire shares are distributed to charity, take the cash, Buffett says, and just buy index funds: My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.

I never said anything about stocks being down for a decade, just underperforming.

I guess that we'll need to agree to disagree whether P/E compression is a real risk to equities. The current P/E is 24.34. The historical mean and median are 16.01 and 14.93, respectively. So even if the index reverts to a P/E of 20 over the next decade, that would reduce stock returns by ~2% annually. So if you take a 2% dividend yield, 5% earnings growth less 2% P/E compression that is 5% return on stocks which is in the range of Vanguard's March 2023 Outlook of 4.4%-6.4% for US equities for the next decade.

[target2019]

Quote:

Originally Posted by FREE866 Fair point. Daily , monthly and yearly drawdowns feel more for sure, but barring something cataclysmic happening the future will most likely resemble something close to the past. No guarantees of course. Someone mentioned goals and for me if we even get 50% of past markets returns I'm good. So I think mentally I just try to focus on that as opposed to drowning in the angst of the volatility.

I'm wondering why my father did not put $1,000 into the S&P 500 in 1950, solely for my use? Maybe because it was 15% of his salary, and 5 more mouths to feed?


While accumulating I did focus very much on those average returns. For me, "now" is simply about the total balance.

I wonder if anything said is meaningful to the OP?

[FREE866]

Quote:

Originally Posted by pb4uski Well, to begin with, the topic of the thread is supposed to be whether one's equity allocation could be 100% S&P 500 index rather than a more diversified equity portfolio so your comment on playing it safe was a bit in left field to begin with. I'm not sure where the idea that an investing strategy for those who want or need growth came from. Second, Warren Buffet's advice to his heirs was to simply invest in the S&P 500 index, so that pretty much answers the OP's question. I never said anything about stocks being down for a decade, just underperforming. I guess that we'll need to agree to disagree whether P/E compression is a real risk to equities. The current P/E is 24.34. The historical mean and median are 16.01 and 14.93, respectively. So even if the index reverts to a P/E of 20 over the next decade, that would reduce stock returns by ~2% annually. So if you take a 2% dividend yield, 5% earnings growth less 2% P/E compression that is 5% return on stocks which is in the range of Vanguard's March 2023 Outlook of 4.4%-6.4% for US equities for the next decade.

Well, the assumption is that if someone is considering stocks they want or need growth. If one doesnt then whats the point? just go into CDs


and as long as I'm a long term investor I have never, am not , and will ever be trying to "play it safe" so thats where that comment came from. I think the other poster used that language and I responded in kind.





The whole PE thing is just a tired narrative and if I invested based on the fear of what the PE is, and what its projected to do etc I'd probably still be working. Since I started investing in 1990 I've been hearing how the "PE is too high" so yeah lets just agree to disagree on that one.

[jurgs01]

Going all into the S&P at a single time of high valuations and extended US overperformance is risky.

If you want to diversify, put equal money into US S&P, US Nasdaq, a commodity index, TLT, a foreign bond index, a foreign developed market index, and a foreign emerging market index and re-balance every year (or add funds to the underperformer).

[ncbill]

It all depends how much you saved and what you spend each year.

If you have ended up with $10 million with annual expenses of $100,000 then 100% in any equity index won't make a whit of difference to portfolio survival over your retirement horizon.

For those who only saved $5 million but spend $200,000 annually it can matter significantly.

Similarly, Warren Buffet's current wife doesn't need to keep 10% in bonds as he recommends after he dies.

With the enormous sum she will inherit 100% in equities would do just fine.

[VanWinkle]

Quote:

Originally Posted by FREE866 I shared it first and yes, love it....totally cuts through the noise with hard data....shows the power of the stock market compounding ...amazing!

+1

[CRLLS]

Thanks pb4uski for the comparison between Total M fund and the SP500. It has strengthened my previous thoughts that there is little difference between them, enough to not be a clear winner over the long haul. Enough to show I should pick either one and not both.

The key indices in daily financial reporting are the Dow and SP500. I have always wondered how many people that have a diversified portfolio and 60/40 AA think that is how their daily earnings and losses respond? At the end of the month/quarter/year do they compare their total investment performance to the Dow or SP500 performance and feel behind? Their personal performance can only come close to the Dow or SP500 if they are 100% in one of those indexes. Anything less than 100% will perform differently. It is hard to determine the right AA/diversification/investment that meets their comfort level when all they hear is Dow and SP500 results on a daily basis.

I'm not suggesting 100% SP500. AA and diversity is for each of us to decide. I am saying that with anything less than 100%, following the daily reports can give a false sense of falling behind the growth curve. One must not fall into that mindset. Easily done if they quit listening.

[RetiredAt49]

Quote:

Originally Posted by pb4uski Second, Warren Buffet's advice to his heirs was to simply invest in the S&P 500 index, so that pretty much answers the OP's question. I guess that we'll need to agree to disagree whether P/E compression is a real risk to equities. The current P/E is 24.34. The historical mean and median are 16.01 and 14.93, respectively.

While Buffett recommended the 90/10 to his heirs… in subsequence sentences in that 2013 letter and in later years he went on to say that the average investor would outperform nearly all actively managed portfolios if he/she were to invest in low cost S&P 500 index fund(s).

For you and others hung up on P/E ratios being at a certain level or range, again take a look at over a century of data that suggest P/E’s are just a metric and nothing more. Look at NVDA’s P/E ratio just prior to their earnings call last week and then explain how their stock jumped 29% overnight… and still maintains that level today.

[Markola]

The blogger Jim Collins at https://jlcollinsnh.com addressed this idea. The simplest path to wealth for a young person, he said, was to work hard, live well beneath your means, and save 50-70% or more of your income into the total stock market index fund VGSAX. At some point in your 30s, the dividend yield would cover your already low expenses, at which point you retire, while your portfolio value explodes upward for the rest of your life, allowing you to increase lifestyle as it does.

[Phroig]

Quote:

Originally Posted by ncbill With the enormous sum she will inherit 100% in equities would do just fine.

Cash under the mattress would also work. She’ll just need to get a King XL (or several).

[Happyras]

Quote:

Originally Posted by pb4uski Interesting idea to add that column but the column doesn't show for me. Perhaps change the fund descriptions to just tickers and it will show.

I can show it, but decided to wait until there was interest in my point. I added a column showing the minimal expected annual return of ITM covered calls using a conservative return of 7.5% starting in 1993, I also did a column showing the same return starting in 1999 with the average of the two S&P funds starting balance. This is the strategy I follow in this link; https://retirecertain.com/in-the-mon...call-strategy/
Its worked for my wealthier friends for years, and provides that low risk return similar to bonds when you expect the market to run flat for some time.

		VG TSM		VG 500		ITM Covered Calls SPY		lost decade options
Year	Inflation	Return	Balance	Return	Balance
1993	2.75%	10.62%	$11,062	9.89%	$10,989	7.50%	$11,000
1994	2.67%	-0.17%	$11,044	1.18%	$11,118	7.50%	$11,825
1995	2.54%	35.79%	$14,996	37.45%	$15,282	7.50%	$12,712
1996	3.32%	20.96%	$18,139	22.88%	$18,778	7.50%	$13,665
1997	1.70%	30.99%	$23,761	33.19%	$25,010	7.50%	$14,690
1998	1.61%	23.26%	$29,289	28.62%	$32,168	7.50%	$15,792
1999	2.68%	23.81%	$36,264	21.07%	$38,945	7.50%	$16,976	$37,604.50
2000	3.39%	-10.57%	$32,429	-9.06%	$35,418	7.50%	$18,250	$40,424.84
2001	1.55%	-10.97%	$28,873	-12.02%	$31,160	7.50%	$19,618	$43,456.70
2002	2.38%	-20.96%	$22,821	-22.15%	$24,259	7.50%	$21,090	$46,715.95
2003	1.88%	31.35%	$29,976	28.50%	$31,174	7.50%	$22,671	$50,219.65
2004	3.26%	12.51%	$33,728	10.74%	$34,522	7.50%	$24,372	$53,986.12
2005	3.42%	5.98%	$35,745	4.77%	$36,170	7.50%	$26,200	$58,035.08
2006	2.54%	15.51%	$41,289	15.64%	$41,827	7.50%	$28,165	$62,387.71
2007	4.08%	5.49%	$43,556	5.39%	$44,081	7.50%	$30,277	$67,066.79
2008	0.09%	-37.04%	$27,424	-37.02%	$27,762	7.50%	$32,548	$72,096.80
2009	2.72%	28.70%	$35,294	26.49%	$35,114	7.50%	$34,989	$77,504.06
2010	1.50%	17.09%	$41,327	14.91%	$40,351	7.50%	$37,613
2011	2.96%	0.96%	$41,724	1.97%	$41,145	7.50%	$40,434
2012	1.74%	16.25%	$48,506	15.82%	$47,656	7.50%	$43,466
2013	1.50%	33.35%	$64,682	32.18%	$62,989	7.50%	$46,726
2014	0.76%	12.43%	$72,721	13.51%	$71,498	7.50%	$50,231
2015	0.73%	0.29%	$72,935	1.25%	$72,391	7.50%	$53,998
2016	2.07%	12.53%	$82,076	11.82%	$80,945	7.50%	$58,048
2017	2.11%	21.05%	$99,355	21.67%	$98,484	7.50%	$62,402
2018	1.91%	-5.26%	$94,132	-4.52%	$94,028	7.50%	$67,082
2019	2.29%	30.65%	$122,983	31.33%	$123,485	7.50%	$72,113
2020	1.36%	20.87%	$148,649	18.25%	$146,018	7.50%	$77,521
2021	7.04%	25.59%	$186,685	28.53%	$187,680	7.50%	$83,335
2022	6.45%	-19.60%	$150,090	-18.23%	$153,468	7.50%	$89,586
2023	1.70%	8.25%	$162,467	9.12%	$167,468	7.50%	$96,305
	AVG	AVG		AVG		AVG
	2.47%	10.96%		11.07%		7.50%

[Happyras]

What I tried to show is not a perfect reflection of selling ITM covered calls on SPY, but on average it should return steady positive growth except for extreme dips in SPY. You sell your upside on SPY in favor of this longer term steady return. The short term deeper dips, going below your strike price, should average out within a short period as SPY has a general trend. It is not meant for my kids who have 40 years to invest and hold. Its for those of us who have won the game and have 10 to 20 years to spend it and do not want to loose it, but still want equities as part of their mix.

[sterlingmossy]

https://creativeplanning.com/periodic-table/

[GaryInCO]

Back to @Enuff2Eat's original question of "why diversify:" as others have said, stocks and bonds tend to move in opposite directions. (2022 was VERY atypical in that regard.) So combining stocks & bonds might lower your returns, but it also reduces the volatility of your account. Many people sleep better with fewer/smaller drawdowns.

Here's a quick comparison between 100% VFINX (SP500) in blue, 60/40 (VFINX/VUSTX) in red, and 40/40/20 (stocks/bonds/gold) in gold. (VFINX and VUSTX are basically the same as SPY and TLT, but with longer history.)

Click here and scroll down to the "Performance Summary" and "Portfolio Growth" sections.

100% SP500 is the winner right now, because of the incredible run-up since 2009. But notice the drawdowns after 2000 and 2008 -- especially since we're in a high-CAPE higher-risk environment now. Like we were in 2000 and 2008. SP500 tends to grow faster, but it also crashes bigger. 60/40 or similar tends to smooth out the bumps a bit. You decide what works for you.

[F.I.R.E User]

What about all in for VTSAX and chill?