The Power of Diversified Asset Allocation vs. S&P 500 Investing

Today we’re going to talk about the differences between investing in the S and P 500 versus a traditional asset allocation diversified portfolio. So the first thing we’re going to look at are the returns of the S and P 500. And the second thing we’re going to look at is an asset allocated diversified portfolio, which we have, I’ve written out here, 44 and a half percent still in the SP, 525% international index, 11% in the MSCI emerging market index, 13 and a half in the mid cap S and P 400, and then 6% in the S and P 600. So why would we have five things instead of one? Well, it’s to manage risk, trying to get the risk as low as possible, standard deviation as low as possible, also keeping the returns as high as possible. So what does this mean? Well, before I move on, let me clean this up. All right. So here we have a 20 year investment. So the first thing we’re going to look at is the orange, which is the S and P 500. And the second thing we’re going to look at is what I just described, the 100 and zero portfolio. So if you put $1 million into each investment, the Orange SP 500 reached a total at the end of 3.8 million and the 1000 reached 4.2 million. Now the 100, and even from an accumulation standpoint here, beat the S and P 500 over the 20 years. I want to point out a couple of things. This includes the tech bust from 2000 2001, and that also includes the financial crisis which happened in 2008. You can see that big drop. It also included this big Covid drop where the market dropped 34%. So what an asset allocated portfolio does is during those storms, during the volatility here, it protects you better. And that’s why at the end of the 20 years, you have a substantially better return. Now, we looked at a different time period though, that the S and P 500 beat the asset allocated portfolio. So again, we have the oranges SP 5000 asset allocated portfolio if we fast forward and don’t start the data till 2003. So if we skip that, what was over a 50% crash in the US markets after the tech bust, and just go right in, kind of from the bottom up here we have the S and P 500 making it 8.1 and then the 100 and making it to 7.8. So in this case, in this random 20 year period, the SP 500 beat the asset allocation portfolio. So depending on the time period, 1 may outperform the other. So during the accumulation stage, we have to realize that does it matter if we have a little bit of underperformance or outperformance. What is my money here for? Well, hopefully your money is here to actually allow you to live life by design when big things come up. Maybe it’s funding your kids college, maybe it’s creating an income stream when you retire. And so if that’s the actual goal, if we look back at some distributions, so now let’s look at the same exact data. So let’s go back to 2000 through 2020, and here we’re going to include some distributions. So what we’re doing is we’re taking 70,000 a year out of our million dollars every year, except when there’s a negative year. And then we’re doing the same thing with the S and P 500. So what happens is the million dollars you start with the 1000 portfolio, you still have a million dollars at the end, even though you took out a total of 1.1 million. The S and P 500, you start with a million, take out the same amount of money and you’re almost broke at the end. So having the optionality of what to take out, when to take it is huge. And so if you look at the data here, so this is first the 1000 portfolio where you start with a million dollars. And here’s the years we take out. So notice we do not take out the first three years. We don’t take out in 2008 and we don’t take out in 2018. So there’s five years we skip where this we would want. The reason you’d want to have some safe bonds or cash would be to offset, to not have to take those distributions. You could actually take a 7% withdrawal rate consistently down the board, skipping those five years. And your million dollars, you still have a million at the end. Now if we do the exact same logic. So this is the S and P 500. Now we start with a million, skip the same five years, but all we have to pull from is S and P 500. Our million dollars now ends with 70,000. So the takeaway here is sure, the S and P 500 may randomly beat an asset allocated portfolio over different 20 year periods. It may underperform that asset allocated portfolio. But if you’re truly building a financial plan that your money is actually supporting your life, it’s not just accumulating just for the sake of accumulating, then asset allocating is absolutely the way to go because it allows you to distribute your money, maintain your money, stay financially secure, have the optionality. The second lesson we have here is that the majority of your wealth. We do recommend keeping long term diversified asset allocated equity markets, but have a fail safe even in asset allocated portfolio there’s still going to be downturns. So pile of cash or cash like assets, whether it’s treasuries, bonds, cash inside of life insurance, et cetera, having that optionality to pull when the market goes down is going to protect you tremendously and allow you to live life by design regardless of what’s happening in the market on a year to year basis.