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https://preview.redd.it/24xhufvf7ieg1.jpg?width=791&format=pjpg&auto=webp&s=551e833747834c42b4b0f612f540b2e1d3b1c8cc
[User Friendly View of the Above](https://docs.google.com/spreadsheets/d/1UB-DCjR8VpKpBtLmoizq8XlxOG55HPE5PSlacoIHbvs/edit?usp=sharing)
A common discussion point in Bogleheads is asset allocation between stocks and bonds, often in regards to stock market downturns. A recurring question in many threads is "How would you feel if stocks dropped 50%?"
As some one who turned 51 in 2008 and was hoping to retire in 2012 at 55 I can tell you it's not a great feeling. But, IMO, the cure for dealing with market drops is worse than the disease. Markets drop and then rebound, but the cost of trying to manage drops tend to be permanent.
With that in mind, I decided to go back and revisit the period from 2008 to 2011, and show what exactly MIGHT have happened for investors with different asset allocations using two common Boglehead ETFs, VTI (US total stock market) and BND (total bond market). I chose five different asset allocations, a 100% VTI investor, and investors with 10, 20, 30, and 40% allocations to BND. These types of portfolios are fairly standard in discussions in Reddit boards, including this one.
The graphic attempts to summarize what I found, in hopefully an understandable format. First, what were the prices for the two ETFs on a monthly basis from 1/1/2008 to 12/31/2011, plus the low on March 9, 2009? Second, how would portfolios using the five different asset allocations fare over those 48 months? And third, once past 12/31/2011, how did those asset allocations perform annually until 12/31/2025?
1. The ETF prices were obtained from Yahoo Finance. Their web page includes an adjusted price for each historic date, which adjusts the price at the time for subsequent splits or dividends. Using the adjusted price effectively allows for reinvestment of dividends to determine the full return over time (price increase plus dividends). For the purposes of the graph, I compared the adjusted price for each month to the beginning price as of 1/1/2008.
For the period from 1/1/2008, the adjusted price of VTI dropped by almost 52% to 3/9/2009, rebounded to approximately 81% of the 1/1/2008 price, and 97% by 12/31/2011.
For the same period, BND rose by roughly 27%, driven in large part by rates on the 10 Year treasury dropping from 4.04% on 12/31/2007 to 1.89% on 12/31/2011 (data courtesy of FRED).
The adjusted prices were the basis for the return calculations.
2. Often when posters on Reddit cite the performance of two different asset allocations, say 100/0 versus 60/40, during a stock market drop, they compare the portfolios using the same starting balance. That is an incorrect assumption! Two--or more--different asset alllocations would have different starting balances.
I assumed the investor starting on 1/1/1990--the inception of a lot of 401(k) plans, including my company--contributing $500/month ($6,000 per year) over the next 17 years, ending on 12/31/2007. I used [this analyzer](https://testfol.io/?s=4LairxpqUvt) for the five different asset allocations. the values ranged from $253K for 60/40 to $292K for 100/0, with about $9 to $10K differences between each allocation.
The table shows the beginning position (for easier presentation, the amounts are in thousands), and then the values for each asset allocation for the four year ends, plus the 3/9/2009 low. The green is the highest value of the five, and the red the lowest. Not surprisingly, the 100/0 and 60/40 portfolios traded places from 1/1/2008 until 3/9/2009; $41K up became $38K down. But by the beginning of 2010, the 100/0 portfolio exceeded the value of the 60/40.
As the blends between 100/0 and 60/40 tended to have returns between the two extremes, the graph over the 48 months I limited to just 100/0 and 60/40. You can see 100/0 starting ahead, then lagging starting in 11/2008, and then running pretty much parallel until 12/31/2011, when 100/0 was slightly ahead of all the asset allocations.
3. The last step was to roll all the information forward. I entered the adjusted price from Yahoo Finance for each year end to 2025 and ran the numbers. That is the last graph and the 2025 table at the bottom. Every year end from 2012 to 2025 the best performing portfolio was 100/0, and each 10% in bonds lagged in steps, with 60/40 being the consistent lowest. The differences grew over time. The graph is a stacked line graph.
I have made my preferences clear here on these boards. I do not believe, and have not for the last 35+ years, that bonds are good investments for individual investors, ESPECIALLY in the accumulation phase. Results like these are why I believe that. Investors choose an allocation like 60/40 to lower the portfolio volatility during periods like 2008/2009, but that short-term insurance costs them substantially over time. By the end of 2025, the 60/40 investor has substantially less than the 100/0 investor, and therefore their retirement is less secure.
Everyone gets to choose how they invest, but a lot of investors hear the horror stories of 2008/2009 because they didn't invest through them. I hope analysis like this clears some of that fog.
P.S. In addition, using the same numbers, I intend to do the analysis showing what happens when an investor invests through a stock market decline. That will take some time to do the numbers and analysis but I think that will be useful information for investors here too.