Introduction
It is easy for me to learn anything before bear market comes. It is called pre-mortem analysis. What is worst case and how long it takes for my portfolio to recover if bear market hits.
Take some notes
Here is the article.
In addition to knowing what the returns of your investments have been recently, be sure to ask the following:
- What has the portfolio returned on average over the past one, three, five and 10 years?
- What was the best and worst three-month period during the past 10 years?
- What was the best and worst one-year period during the past 10 years?
- What was the best and worst three-year period during the past 10 years?
- How has the investment performed during past wars, bear markets, terrorist attacks and elections?
Case study
As an example, let’s answer these questions assuming you had a moderate portfolio consisting of 75% stocks and 25% bonds, such as a combo of Vanguard Total Stock Market Index Fund (Ticker: VTSMX) and Vanguard Total Bond Market Index Fund (VBMFX), rebalanced annually. You would have enjoyed an average return of 11.98%, 7.43%, 11.14%, and 7.06% over the past one, three, five and 10 years (according to Morningstar) for the period ending 8/31/2017. However, to obtain that 7.06% 10-year return you would have had to endure a worst three-month period watching the portfolio fall 23.45%, a worst one-year period with a drop of 32.03%, and a three-year period that lost 3.98% per year. For the 10-year period ending 8/31/2017, a $500,000 investment into this portfolio would now be worth $999,194.
My notes
75% stocks - VTSMX
25% bond - VBMFX
8/32/2007 - 8/31/2017
average return
past one 11.98%,
past three 7.43%
past five 11.14%
past 10 years 7.06%
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