Just over 10 years ago, as I was mentally recovering from the Great Financial Crisis, I plotted my final drive to early retirement.  Before this time, I was not a particularly mindful investor.  Although I stayed relatively calm during the Great Financial Crisis, I made a few boneheads moves like moving mostly to cash in my 401K account for several months.

This experience motivated me to be less emotionally susceptible to future market gyrations.  And around this same time, I started to get into meditation and mindfulness, which resulted in the mindful investing approach described here at Mindfully Investing.

Using mindful investing principles, I started to realize that picking individual stocks was mainly a loser’s game.  I slowly converted my portfolio from a mixture of funds and individual stocks to a strict low-cost index investing approach.  But there are many flavors of index investing, so I had to choose a particular portfolio.  I considered several different options, which I’ll detail in a moment.

Now, after more than a decade of investing in low-cost stock index funds, I’ve started to wonder how my outcomes might have differed had I picked a different portfolio back in 2010.  In today’s post, I’m going to compare the performance of my candidate portfolios from 2010 to the one I actually picked and continue to use.

Mindfully Unmindful

I have to say that this is not a particularly mindful thought process.  Mindfulness practitioners see the obvious truth that only the present really exists, while the future and the past are just figments of our active imaginations.  In every sense, it doesn’t matter how other portfolios performed, because I can’t jump in a time machine and do it all over again.  There are no “do-overs” in investing.

Further, the math of such comparisons usually fosters nothing but regrets.  For example, if you randomly generate a handful of different portfolios and then back-test them, only one of them will have performed the best.  Or maybe two portfolios will have tied for the best.  So, the odds are that you’ll feel stupid for picking one of the “sub-optimal” portfolios.

However, this logic reminds me of that old advice that to control our emotional reactions, we shouldn’t “peek” at our portfolio balances too often.  In my view, mindfulness is obviously better than the “don’t peek” approach, because the mindful investor is better informed about reality but resists panicky decisions.  So, rather than being afraid of how my portfolio performed relative to other possible options, I choose to embrace this information and carry on with my investment game plan regardless of the results.

Aside from all that, I think there may be some value in comparing my predictive thought process from a decade ago to the reality that ensued.  Perhaps, it might reveal some cognitive biases in my decision that I can try to avoid in the future.  Or maybe I might find that I made some seemingly good choices, but for irrational reasons, which also might spur better future decisions.

Caveats

Before detailing the portfolios I considered in 2010, I should list what’s not included in this evaluation.  First, I’m ignoring the real estate portion of my portfolio because, over the last decade, I’ve jumped in and out of several rentals for practical reasons, and it’s simply too complicated to figure all that into my calculations.

Second, as I approached retirement I built up a cash reserve that represented 20% of my non-real estate investments for reasons that I describe in this article.  That cash came from new savings as they became available, and it really didn’t impact the remainder of my portfolio (in stock funds) one way or the other.

So, in today’s portfolio comparisons, I’m looking at how my investments performed outside of real estate and cash.  However, one of the candidate portfolios I’m about to describe contained bonds.  If I had selected that portfolio in 2010, I likely would have held less cash, because both bonds and cash serve a similar counterbalance function to stocks.  In this one case, my comparisons below are slightly apples-to-oranges, at least in terms of how I personally would have invested.

Portfolios of The Past

As best I can recall, in 2010 I considered about five different flavors of portfolios outside of my evolving real estate and cash holdings.  They were:

• Portfolio 1 – A World Stock market portfolio comprised of 60% in a U.S. stock fund, 25% in a developed market (excluding the U.S.) stock fund, and 15% in an emerging market stock fund.  This is the portfolio I chose in 2010, which I continue to hold today.
• Portfolio 2 – An approximation of the Warren Buffett portfolio, which as I defined it, contained 100% U.S. large-cap stocks as represented by an S&P 500 index fund.
• Portfolio 3 – An U.S. All Stock portfolio, which is 100% in one index fund that tracks the entire U.S. stock market.  Essentially, Portfolio 3 adds a little exposure to smaller U.S. stocks as compared to Portfolio 2.
• Portfolio 4 – A combined U.S. stock/U.S. Treasury Bond portfolio consisting of 70% of a U.S. all-stock fund and 30% of a 10-Year or intermediate Treasury Bond fund.
• Portfolio 5 – A U.S. Stock portfolio with a stronger tilt toward smaller stocks consisting of 60% in a large-cap fund, 20% in a mid-cap fund, and 20% in a small-cap fund.

I didn’t consider tilting toward “value” stocks because frankly, at the time I didn’t fully understand the value factor and how it’s supposed to work.

I plugged these five portfolios into Portfolio Visualizer’s asset allocation back-test calculator for the period from 2010 through the end of 2020.  I specified a $10,000 initial investment, additional contributions of $10,000 per year¹, and quarterly rebalancing.

Results

This table shows some key performance statistics for the five portfolios since 2010.  Again, the first portfolio, World Stocks, is the one I actually chose.

Portfolio	Final Balance	Money-Weighted Rate of Return	Standard Deviation	Maximum Drawdown	Return/Risk Ratio
1. World Stocks	$267,546	12.41%	14.41%	-22.24%	0.86
2. US Large Cap	$337,633	15.87%	13.78%	-19.63%	1.15
3. US All Stocks	$336,317	15.81%	14.31%	-20.89%	1.10
4.US Stocks/T-Bonds	$270,988	12.60%	9.22%	-12.34%	1.37
5. US Stocks Size Tilt	$324,250	15.27%	14.76%	-22.95%	1.03

As of the end of 2020, it turns out that my portfolio of World Stocks came in last among this handful of options in terms of the final balance, money-weighted rate of return, and return/risk ratio².  And my World Stock portfolio is second to last by the other measures.

The best performing portfolio by most measures was the U.S. Large Cap portfolio.  U.S. Large Caps have essentially outperformed almost every imaginable asset class over the last decade at least in part because of the huge growth of some very large companies like Google, Apple, Facebook, Netflix, and Amazon.

Here are some visuals of the comparative performances of the five portfolios.  My World Stock portfolio is noted in yellow.

Unfortunately, my portfolio had the lowest returns with close to the highest volatility.  Not a particularly noteworthy accomplishment.

Rebalancing

I’ve never agreed that rebalancing is the “slam dunk” it’s supposed to be.  As a result, I can’t say that I actually rebalanced with the precision assumed by the above analysis.  What I’ve generally done over the years is contributed new money at the end of each year such that my proportions of U.S. stocks/Developed Market stocks/and Emerging Market stocks were driven back toward the original 60%/25%/15% allocations.  But this rarely, if ever resulted in a perfect rebalancing, and I clearly didn’t rebalance every quarter.

So, I was curious how these results would change if I used the “no rebalancing” option in Portfolio Visualizer instead of “quarterly rebalancing”.  In a way, this provides two bookends for where I most likely ended up over the years.  Here are the same two graphs for these portfolios with no rebalancing.³

Less stringent rebalancing most likely boosted my portfolio’s overall returns.  And the same effect can be seen with the US Stocks/T-Bonds portfolio as well.  This probably occurred because U.S. stocks substantially outperformed the other asset classes, and therefore, represented a larger proportion of these portfolios as time passed.  However, it’s notable that less stringent rebalancing actually had the opposite effect on the returns of the Size Tilt portfolio.

Lagging International Stocks

The flip side of the outstanding performance of U.S. stocks, particularly large caps, is that international stocks performed relatively poorly over the last decade.  Believe it or not, way back in 2010, the storyline was that U.S. stocks were overvalued compared to international stocks, which suggested that international stocks might be set to outperform.  So, it’s somewhat remarkable that the same story is still being told today per this example from Eaton Vance.

It turns out that international stocks were just getting progressively cheaper as the years went on, as this graph from the same Eaton Vance article illustrates.
That’s the problem with market timing.  The stock market can stay irrational for far longer than anyone ever assumes.  Are international stocks in aggregate really worth 25% less than U.S. stocks today?  I’d say probably not.  But the market continues to disagree with ever greater fervor.

Conclusions

You could say that my cognitive biases swallowed the story about undervalued international stocks back in 2010.  And I’m sure the tempting bait of superior returns warped my thinking to some extent.

However, the case for international stock diversification still seems logical to me regardless of any prevailing market conditions.  The most fundamental reason for diversification is to not put all our eggs in one basket.  That is, some countries may crater while others boom due to regional or country-specific issues.

In another sense, my portfolio performed better than I expected.  The 12.4% annualized return for the World Stock portfolio was still way above the long-term annualized return for U.S. stocks of about 9% to 10%.

It’s just that the country that boomed (the U.S.) and the countries that lagged (the rest of the world) were the opposite of what most people expected in 2010.  As a result, my World Stock portfolio underperformed the more U.S.-centric portfolios, but not by a huge amount.  That’s the normal price of diversification.  You pay in terms of somewhat lower returns to avoid the catastrophic losses that are possible with more concentrated bets.

So, even knowing what I know today, I’d likely select the same portfolio again.  And that’s why I’ll continue to follow my investment plan of an internationally diversified all-stock portfolio.

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1 – Unlike some bloggers who seem to relish publishing their exact financial details for all to see, I’ve always been reluctant to present my specific dollar values.  So, I chose the $10,000 initial and annual contributions as roughly proportional to my actual investments.  So, the resulting dollar amounts I will present differ considerably from my accounts, but the percent returns, volatility, and return/risk ratios are very similar to my actual account.

2 – Money-weighted rate of return is like an annualized compound growth rate which factors in the timing and amounts of contributions to the overall return calculation.  You can read more about it here.  Return/risk ratio is just dividing the money-weighted rate of return by the standard deviation, which is the measure of volatility (standard deviation) or “risk” in this case.  The higher the return/risk ratio, the greater the returns produced for each percent of volatility experienced.  

3- Rebalancing assumptions do not affect portfolios with only one asset class, which in this case are Portfolios 2 and 3.