What I Learned

In 2003 I began the transition from saving and investing for retirement to investing in retirement. From September 1, 2003 until the end of December 2006 my compounded annualized gain with all dividends reinvested (total return) and before tax was 11.85% per year.

 

 For the three years from Dec 31, 2006 to December 31, 2009 my compounded annualized gain was 6.45% per year. For the entire period from 2003 the compounded annualized return was 8.45%.  The original gold still held form September 1, 2003 compounded at 18.7% per year and is a much larger percent of my total portfolio now. I had some substantial long term profits from real estate investments taken in 2006-2007 which are not included in these results. The original accounts have stayed the same, and the new money has been similarly handled in a separate account

 

Part of the slowdown in gains after 2006 was due to my gradually shifting  to a portfolio with a much higher percentage in bond and cash funds and part was the general market deterioration. The Vanguard SP500 Fund total return for 2007-2009 was -5.8% while the pure multi-sector bond fund PTTRX was up 9.29% annualized.

 

If we look at  the whole period from September 1988, which is the start of my FastTrack data base, to present, PTTRX was up an annualized 8.92% per year while the SP500 Fund VFINX was up 9.00 and VWINX Wellesley Income was up 9.21%, all annualized total returns. On the other hand, for the past ten years PTTRX is up 7.88%, VWINX 7.06%, and VFINX down 1.16%, all again in annualized total returns. Using the FastTrack Ulcer Index of downside volatility, VFINX is five times as volatile as VWINX and ten times as volatile as PTTRX.
 
What have I learned from all this? First, it's a good idea to de-emphasize stocks before a stocks bear market. :) I outperformed the total return SP500 Fund by 14.25% for 2007, 2008, and 2009 and both gold and PTTRX did much better than that! I had planned to reduce stocks anyway in 2006/2007, and I began to get worried about a bear market in 2006, so both motivations helped. The very last thing one wants to do is lose a lot of money just before or after retiring and drawing it down. If anyone reading this takes nothing more from this post than that and engraves it in memory, I will be very gratified.

 

Second, over much longer periods of time, as since September 1988, one can find a lot of funds which had fairly comparable and good results, with the examples of VWINX, VFINX and PTTRX all gaining approximately 9% annualized total return. This is the argument that many mutual fund boosters make for buy and hold young investors. Vanguard Wellington Fund is up 9.92% since September 1988 and is up 8.11% annualized total return since July 1, 1929.

 

Third, the bond market (or at least most sectors of it) has been in a bull market since the early 1980's, and stocks have been in a bull market for a lot of that period even with three very severe bears markets. So what I know is based on that. What happens in the future is unknown, but history says that bonds do not stay in bull markets forever. We don't know for sure when a bear market will start or will have started for bonds.

 

Fourth, when you start investing plays a big role unless you are investing for forty years or more. If you started ten years ago, PTTRX was up 7.88% annualized, VWINX up 7.06%, and VFINX down 1.16% as noted above. Gold is up 13.9% annualized.

 

My personal summary: If you have many decades to save and invest before you'll need the money, and you are not a consistently successful trader, or don't want to be, you should probably invest in a few high quality broadly-based funds and include some bonds, and then forget about it. Once you are about ten years from needing the money it's wise to start reducing volatility and increasing income by gradually increasing the bond component up to perhaps 70% from 20% which was the base.

 

Personally I would also include 5% in gold to start with and  increase that gradually perhaps to 15% starting ten years before retirement. That's the inflation insurance in case both stocks and bonds don't do well in late pre-retirement years. Markets will probably be a lot different in forty years, but always remember Vanguard Wellington's 8.11% annualized returns for the past 80 years. This not to boost Wellington, although it's a good fund, but to suggest that stocks, seasoned with bonds or other assets, will still probably be a decent investment for retirement fund money over the long run.

 

All this sounds easy and certainly boring, but I can tell you that it is neither! It is very hard for most people to do these things consistently and willingly, and the volatility of markets and of our personal lives makes it even harder to do. As with most things,  success starts inside each of us or not at all.