Monday, January 27, 2020

Why Not Just Invest in Stock Index Funds?

Financial Independence recently asked in the comments why I don't just invest in a portfolio of stock index funds. I answered that I am more interested in protecting against the downside now than getting richer. But basically I think you can do better than that. This is the simulated performance of our target portfolio against the MSCI All Country World Index and ASX200 in Australian Dollar terms:

Notice what happened during the 2000-2002 Tech Wreck and 2007-2009 Global Financial Crisis? The target portfolio more or less flatlined, while Australian shares dropped 40% in 2007-9 and the MSCI fell around 20% in AUD terms. Over this whole period the portfolio also outperformed the MSCI index, though not in recent years.


Financial Independence said...

Hi mOOm,

A picture is worth a thousand calculations. I appreciate attention to the comment and time you took to explain
why do you balance your portfolio against the perceived risks. I would probably will consider something similar when I will be 10 years out from desired retirement / financial independence date.

I think from 2009 we had good last decade, hence its explains reasonably stable upward looking graph.

Separately thank for sharing the portfoliocharts site, I found it provocative and enabling me to look differently on my existing portfolio. said...

Then again, although this seems to show same performance for lower risk, the reality is that this particular period included the worst global recession since the Great Depression, so would be expected to adversely impact portfolios with higher risk-return, and give a relative advantage to a portfolio that has a lower risk-return.

Over the longer term (or some other period (eg. 1990-2005) I'd expect your target portfolio to have lower volatility than, say, the Vanguard High Growth Index Fund, but also to underperform it. And to (possibly) get similar return to an index fund that has a similar volatility (eg. Vanguard Growth Fund)?