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How to grow your money

By Judy Martel · Bankrate.com
Friday, March 25, 2011
Posted: 2 pm ET

How much attention should you pay to stock market fluctuations? Not much, if you're building a portfolio for retirement, say the experts. The best way to build wealth in the market is the "steady as you go" approach, with an eye toward the long term, not the short-term volatility.

Mutual fund company T. Rowe Price published statistics to reiterate the point that historically, the Standard & Poor's 500 index performs well over time. From December 31, 1990 through December 31, 2010, $100,000 invested in the S&P 500 index would be worth $575,111, despite two of the worst bear markets on record since the Depression, in 2002 and 2009.

Over the same period, bonds returned steady growth, though they were not as volatile. As measured by the Barclays Capital Aggregate Bond Index, $100,000 invested on December 31, 1990 would be worth $379,205 at the end of the 10-year period, with very little volatility.

Since 1926, there have been 76 rolling 10-year periods, during which the S&P 500 index produced gains in 72 of them and losses in four. Stocks produced positive returns in every 20-year period since 1926. The bond market declined during nine of the past 85 calendar years, or less than 11 percent of the time, according to T. Rowe Price.

Obviously, past performance will not indicate future performance, and this example will not mirror your individual investments. Although few would dispute that this past decade was one of the ugliest, the essential message is that a portfolio balanced between stocks for growth and bonds to smooth out the volatility is a better bet in your future than chasing returns. Once you're approaching retirement, or already in it, your needs adjust to the near term. That's when increasing your allocation to bonds and savings will provide more even -- though generally lower -- returns.

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John D. Buerger, CFP®
March 26, 2011 at 1:01 pm

All analysis like this ignores one simple truth - it all depends on WHEN you start the clock ticking.

Our research shows (for example) that the equivalent compounded rate of return for an investment in the S&P 500 starting in 1962 was 5.77% (including dividends) with a standard deviation of 16.5%. That's a pretty wild roller coaster ride compared to an all-10-year-treasury portfolio with an equivalent compounded return of 4.8% and a standard deviation of 2.5%.

If I choose to start that period in 1968 instead, I can push up the treasury compounded yield to 5.43% and the S&P yield stays essentially the same (5.78%). We're not even talking a full bond portfolio which will have a higher yield (with extra volatility). This is 10-year treasuries all held to maturity (no interest rate risk - which is huge BTW going into the next several years).

For an investor in 1968, why would it be a good idea to put their money on the stock market roller coaster with more than six times the risk in order to get essentially the same return they could get by buying treasuries?

I'm always challenged with the data that people (even large research firms) use to back up their claims - especially when that claim is to ignore risk because "over the long run everything works out."