Financial adviser

How One Mediocre Investor Prospered After the Market Crash

The mediocre financial advice I’ve offered in my last few posts boils down to this: Use low-cost funds, establish an appropriate asset allocation, and rebalance it annually.

It’s not new advice. My own portfolio was strongly influenced by it back in the early 1980s. By the 1990s, it was pretty much the standard advice you would get anywhere. Many studies at the time showed that a very simple portfolio — just an S&P 500 index fund, plus a long-term bond fund — tended to outperform managed funds, especially after the costs of the managed funds were taken into account.

I haven’t seen as many studies in the years since the financial crisis, so I thought I’d take a quick look at how this sort of basic asset allocation held up in the aftermath.

Most people date the financial crisis from 2008, but I tend to date it from June of 2007, because that’s when I found out that I’d be losing my job. For that reason, the graphs below run from then through the latest data available as of March 29, 2017.

As it turns out, a mediocre portfolio held up pretty well.

Criteria for success

To decide whether a particular style of investing is a success, it helps to know what your goals are. Most people would include “maximum return” as at least part of their goal, but instead, I suggest that your portfolio provide an investment return that supports your specific life needs.

A portfolio that comfortably beats inflation is part of that. It’s also a plus if the portfolio doesn’t swing wildly in value — in case your circumstances require you to cash out a significant amount on an emergency basis. It’s nice, too, if the portfolio provides a mix of income and growth, so that if changes in what’s in fashion among investors push one category of stocks up or down, the overall value of your portfolio doesn’t take too big of a hit. (Personally I’ve always had a sneaking preference for income, even though tax policy has often favored growth.)

With those criteria in mind, let’s look at how some of the pieces of a mediocre portfolio have done.

Pieces of a mediocre portfolio

The most basic mediocre portfolio is just an S&P 500 index fund and a long-term bond fund, with the ratio between those two gradually shifting from mostly stocks (for a young person) toward mostly bonds (for someone who has already retired).

Stock market investments

The value of an S&P 500 index fund dropped dramatically during the crisis itself, but it hit bottom well before the end of the recession, recovered all of its losses by 2013, and is now about 50 percent above where it started — meaning that on stock…