Pop quiz question:

From January 1, 2000 until January 1, 2013 the S&P 500 price return index only gained 1.73%. That's not 1.73% per year but 1.73% for that entire 13 year period! So how much did $100,000 (with 25% invested in an S&P 500 index fund and 75% in 10-year Treasury bonds) grow to by the end of 2012 if dividends and interest were reinvested, and a simple annual rebalancing strategy was implemented once per year to maintain the 75/25 ratio?

A) $110,316 --- B) $148,084 --- C) $176,459 --- D) $218,904










ANSWER: $218,904


This was a little bit of a trick question because the S&P 500 price return index does not include dividends. Websites like Yahoo finance do not provide total return charts that factor in dividends, nor do they factor in compounded growth if you were to reinvest dividends. Additionally rebalancing typically increases returns.


Many investors have been falsely led to believe by commission-based "advisers" that the open market is risky because stocks alone performed poorly during the 2000's. They use this false premise as their platform to sell annuities and other oddball products. The whole time they blatantly ignore diversification into bonds. Bonds are slow, consistent and serve as a "stock shock absorber".


They also ignore the positive cumulative effects of dividend / interest reinvestment and compounded returns over time.


According to Vanguard rebalancing adds up to .35% annually. Over time this can further compound.


So during the "lost decade" from 2000 - 2010, if you were an ultra-conservative investor who was appropriatly diversified into not just stocks but bonds, then you weathered the stock market storm just fine! By the end of 2012 (after 13 years) your actual annualized return on investment was a respectable 6.2%. Treasuries lagged in 2013 and so this brought the 14 year annualized ROI down to 5.8%.


In conclusion it is critical that investors study the historical returns of bonds and stocks before being tempted to invest in alternative products being pushed on them by commission-based "advisers".



NOTE: You can perform your own return on investment calculations at this website.


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