Investors want to crush the stock market, and rightfully so, but is it necessary? Must you beat the stock market to reach your goals? Since 1926, the S&P 500 has generated an average annual return of 10.1%. If you earn 10% per year, your money will double every seven years. Allocating all your assets to stocks may allow you to better the market’s returns, but it isn’t likely, especially over time. And, once you start to diversify your portfolio by adding bonds or real estate or international stocks or cash, you probably will only better the market in down years, and who wants to be the best loser? As Ricky Bobby said, “If you’re not first, your last.”
According to a recent Wall Street Journal article: “Members of the American Association of Individual Investors found that they overestimated their own investment returns by an average of 3.4 percentage points a year relative to their actual returns, and they overestimated their own returns relative to those of an appropriate benchmark by 5.1 percentage points.”
However, all is not lost if you don’t outperform the S&P 500. In fact, you can do quite well by not posting above-average returns. What matters most to your financial future is saving and longevity. The more money you can save, and the longer you can do it, the better your financial foundation will be. For example, my daughter opened a Roth IRA a few years ago. If she invests $6,000 per year for fifty years in a generic balanced fund, her account balance could be worth more than $6.5 million.
To dig into balanced funds deeper, let’s look at a few managed by Putnam, American Funds, Fidelity, Schwab, and Vanguard. The average allocation for these funds is 61% stocks, 34% bonds, and 5% cash – an allocation some financial experts consider a relic.
George Putnam Balanced Fund (PGEOX). Launched in 1937, this balanced fund has generated an average annual return of 8.91%. Investing $10,000 per year from inception is now worth $144 million! However, if you invested all your money in the S&P 500, it would be worth about $310 million today. You trailed the market by $166 million. By not investing in the market, you “lost” more than you made. If this fund was in your account today, would you be disappointed with a balance of $144 million? I doubt it.
American Funds American Balanced Fund (ABALX). Since 1975, this balanced fund produced an average annual return of 9.99%. Investing $10,000 per year from July 1975 to August 2020 is now worth $8.03 million. If you invested in the S&P 500 instead, you’d be worth $10.5 million. Would you be upset with $8 million in your bank account? Unlikely.
Fidelity Balanced Fund (FBALX). Since 1986, the Fidelity Balanced Fund has averaged 9.26%. A $10,000 annual investment, for 34 years, is now worth $2.25 million. It also underperformed the S&P 500. If you allocated 100% of your assets to the S&P 500, your balance would be $2.7 million. Are you offended with an investment account balance of “only” $2.25 million? Probably not.
Schwab Balanced Fund (SWOBX). Schwab’s balanced fund started in 1996, and it has generated an average annual return of 7.15%. Investing $10,000 per year for 24 years produced a gain of $629,000. A similar investment in the S&P 500 would be worth about $850,000. You underperformed the market by more than $200,000, but you still have $629,000.
Vanguard Balanced Fund (VBAIX). Vanguard’s fund is twenty years old. It opened for investing in 2000 at the top of the Tech Wreck and the start of the lost decade. Despite starting a fund at one of the worst times in history, the Vanguard Balance fund still produced an average annual gain of 8.29%. Investing $10,000 per year, for twenty years, is now worth $502,000. Like the other funds, it underperformed the market, but you still have a half-million dollars in your account, not too shabby.
Despite these five stellar funds underperforming the market, they produced phenomenal gains for shareholders. The average annual return for these funds has been 8.72%. Year-to-date, they’re up 7%, and for the past year, they’ve increased 13%.
If the S&P 500 offers such stellar returns, why not allocate 100% of your assets to stocks? You can, of course, if you have the temperament, but I’ve found most investors don’t have the fortitude to invest all their money in the market, especially when stocks fall by 30%, 40%, or 50% as they did in 2000, 2008, and 2020. Investors prefer a balanced portfolio of stocks, bonds, and cash based on their long-term goals. Rather than focusing on the market, pay attention to your goals, save your money, follow your plan, and pursue a balanced life.
“Be moderate in order to taste the joys of life in abundance.” Epicurus
September 10, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
Fund data provided by YCharts and Morningstar.
Picture Credit: Orla, IStock Photos
 https://www.wsj.com/articles/investors-still-believe-they-can-beat-the-stock-market-11599491572?mod=searchresults&page=1&pos=1, By Meir Statman, September 7, 2020