I TURNED 32 LAST month. My mother, clearing through clutter as she and my father look to downsize ahead of retirement, found an old savings bond of mine issued shortly after I was born. It’s a series EE bond that cost a modest $25 in December 1987. The finance professor in me reacted with “imagine if that were invested in the S&P 500.”
The $25 savings bond had grown to $104, a 4.1% nominal annual return and 1.9% after figuring in inflation. Not bad, I guess. It being a 30-year savings bond means the window during which interest is earned has ended, so it’s in my best interest to cash in the bond.
I teach portfolio management at the University of North Florida and I shared this story with my students. I also shared with them what the investment could have been worth.
I bet you’re guessing it would be a tidy sum if it had been invested in an S&P 500 index fund, and you’d be right—$686 to be precise, according to PortfolioVisualizer.com. Why wasn’t I consulted? Well, I was just five days old. Had it been put to work in a more aggressive manner, such as a U.S. small-cap fund, the ending value would be a whopping $763.
There is a dark side, though. My lifetime has seen a stellar run for U.S. stocks versus other areas of the world, as I’m sure nearly all readers are aware. The Japanese stock market accounted for nearly half of the global market at its peak in 1989. Surely an investor would have been tempted to play that market given its hot streak, especially as we’re all subject to recency bias. What if my parents had rolled the dice with Pacific Rim stocks? The not-so-tidy sum would have grown to just $61 by 2020, not even keeping pace with U.S. inflation.
But let’s say the investor thought more globally and invested in MSCI’s All-Country World ex-USA index. Non-U.S. stocks have greatly underperformed the U.S. since the late 1980s, so the same $25 would now be worth just $120 had it been invested—at no cost—in a non-U.S. stock index.
What if the investor were a bit more cautious, and desired to hold a significant bond allocation? A portfolio of 60% U.S. stocks and 40% U.S. bonds with annual rebalancing would have yielded a value today of $429, equal to a 9.3% annual return, with fairly low volatility. Two other possibilities: A gold investment would have produced a value of $72, while a long-term U.S. bond investment would now be worth $282.
Here’s the point that I tried to convey to my students: As wealth grows, diversification—and rebalancing—are critical. Don’t get caught up in the herd mentality and invest in what’s being talked about, such as Japanese stocks in the late 1980s or gold in the current century’s first decade. Instead, draw up your own investment policy statement and have a plan to build wealth over time, while still being flexible to whatever life throws at you. Easier said than done, of course.
Even the most sophisticated and successful savers and investors have regrets about decisions decades ago that cost them dearly in today’s dollars. But we can’t look at life that way. All we can do is learn from our past decisions and then make our best judgment today.
But pardon me, I’ve got to go. It’s time to visit a brick-and-mortar bank for the first time in a few years—so I can cash in my EE bond.
Mike Zaccardi is a portfolio manager at an energy trading firm and a finance instructor at the University of North Florida. He also works as a consultant to financial advisors on an hourly basis, helping with portfolio analysis and financial planning. Mike is a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at MikeCZaccardi@gmail.com.