Field of Play
Leaving moderate risk in the dust
In this post I will compare two approaches to investing your retirement savings. One might be considered taking a ‘moderate’ risk and the other a ‘normal businesslike’ risk.
To begin, let’s reflect on your objectives in saving and investing for retirement. To my way of thinking it makes sense to get the best return you can on your investments over the very long haul -without undue risk.
Here are the approaches: The first, Case 1, is to invest in a broad mix of the best U.S. stocks, global stocks in developed and emerging markets and very safe bonds. The second, Case 2, is to invest solely in the very best U.S. stocks.
iShares Core Moderate Allocation ETF (AOM – NYSE)
For case 1 we can use this ETF. Approximately one half its holdings are U.S. bonds, one quarter track the S&P 500 stock index and the balance include a smattering of U.S. mid-cap and small cap stocks along with a mix of international developed and emerging markets stocks. The blurb says: “Harness the experience of BlackRock and the efficiency of iShares ETFs to get a broad mix of bonds and global stocks.” The ETF is described as a diversified core portfolio based on moderate risk considerations.
What I can say is that AOM is a good benchmark for this style of investing. Let’s take a look at the performance of this Case 1. This chart is taken from the iShares website.
The chart suggests a nice gain over 16 years on $10,000 invested in 2008. A couple of comments: November 2008 was in the midst of the Great Financial Crisis, a time of maximum panic. The stock market had tumbled some 40% in the previous 12 months. So, picking a start of November 2008 neatly sidesteps the fact that the ETF would have lost big time in the previous 12 months. iShares knew this when they picked this start date.
My second comment is that the chart they use to show results is distorted. The distance from 10,000 to 15,000 is the same as the distance between 20,000 and 25,000. When you think about it, a rise from 10,000 to 15,000 is 50%. A rise from 20,000 to 25,000 is 25%. When you look at the chart you get an exaggerated impression of recent results.
My final comment is that the slope of the chart line shows a steady and substantial move up as you look to the right. Steepness suggests perky performance. But iShares, who prepared the chart, set the scale to make the chart look perky.
Actual returns on iShares Core Moderate Allocation ETF (AOM – NYSE)
IShares notes that both its Total Return and Market Price return include amounts for distributions. When one is comparing returns, one must be careful to compare apples to apples. Normally, price return does not include distributions and dividends. What that means is that normally price returns are less than total returns. iShares offers return data that makes market price look good. Note also that iShares has chosen a benchmark that makes the return on the ETF look respectable.
Compare with S&P 500
Let’s look at a table to compare the iShares Core Moderate Allocation ETF (AOM – NYSE) with the S&P 500 index.
The S&P 500 index is widely regarded as one of the best measures of the overall performance of the US stock market. It is a good benchmark for assessing returns from an all-stock portfolio. IShares has an ETF that tracks the S&P 500 index, the iShares Core S&P 500 ETF (IVV – NYSE).
Our family has all its investable assets in an all-stock portfolio and I can use the S&P 500 Index to compare our returns. I consider investing in an all-stock portfolio to be taking a normal businesslike risk.
Looking at the table below we can focus on the ten-year returns and the since-inception returns. The AOM ten-year return is 4.34% compared with the ten-year IVV return of 11.99%. The ‘since-inception’ returns are closer. But we don’t know the inception dates. Both the AOM and IVV ten-year returns include distributions. So, one is comparing apples to apples and looking at total returns in both cases.
————————————————————iShares AOM——————————iShares IVV
The last thing we need to look at is a chart comparing the performance of the iShares Core Moderate Allocation ETF (AOM – NYSE) with the S&P 500. You don’t get this on the iShares website. It comes from my discount broker, RBC Direct Investing. SPX is the symbol for the S&P 500.
There are several things to note about this chart comparing the returns of AOM and SPX. First, the chart makes clear that investing in an all-stock portfolio has left AOM, the broad mix of bonds and global stocks, in the dust. The AOM data would come from iShares and be total return, i.e. including distributions. The SPX is a price chart. So, it is quite likely the VOM data unfairly flatters the return of AOM; i.e. AOM total return vs SPX price only. Apples to apples would use the SPXTR index. So, I’m not being unfair to AOM; to the contrary.
Second, the line on this chart in dark blue showing AOM is displaying the same data over the same time period at the first chart in this post which suggested perky performance for AOM. On the chart below, the performance of AOM doesn’t look at all perky.
Third, there is no guarantee that either this absolute performance or this relative performance will repeat itself over the next sixteen years.
Conclusion
My money is on stocks. In the last fifty years my default asset allocation has been 100% stocks and I’m happy with it. The evidence of the last 16 years supports the conclusion I came to when I started investing.
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The discussion of stocks vs bonds vs other asset classes is more involved than can be covered in this post. I invite readers wanting to dig deeper to take a look at the following posts:
My thoughts on asset allocation
Also, take a look at the Motherlode Chapter 1. Stocks Beat Every Other Asset Class.
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Readers investing in stocks also need to know about bubbles. The following link will take you to what I have written on this: bubbles
Also, check out the following post:
What you need to know about bubbles
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You can reach me by email at rodney@investingmotherlode.com
I’m also on Twitter @rodneylksmith
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Check out the Tags Index on the right side of the Home page that goes from ‘accounting goodwill’ to ‘wisdom of crowds’. This will give readers access to a host of useful topics.
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You can also use the word search feature on the right-hand side of this page to find references in both blog posts and also in the Motherlode.
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There is also a Table of Contents for the whole Motherlode when you click on the Motherlode tab.
Want to dig deeper into the principles behind successful investing?
Click here for the Motherlode – introduction.
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