In 2000 growth stocks had completed an incredible run that left growth stock investors with almost unreal returns. Could it last? Here we have an analysis that takes the top five companies in the S&P 500 from the year 2000 and looks forward 20 years from both an accumulation and distribution point of view.
Portfolio 1 is an equal weighted portfolio of the top five stocks of the S&P 500 in 2000:
Microsoft - Intel - Exxon Mobil - General Electric - Cisco
Portfolio 2 is an equal weighted portfolio of three uncorrelated equity classes:
US Small Cap Value - US Large Cap Growth - Emerging Markets
Accumulation Phase: How did we do?
Both portfolios grew successfully over the next 20 years. Saving $500 per month on an inflation-adjusted basis:
Portfolio 1: $394, 281
Portfolio 2: $407,973
Both of these portfolios do fairly well with wealth accumulation, despite the Dot-com selloff as well as the 2008 Crisis. At the 10 year mark, Portfolio 2 was significantly ahead,
Portfolio 1: $78,657
Portfolio 2: $104,806
If you were crunching the numbers, you would find that the time-weighted rate of return on Portfolio 1 was -1.1% at the 10 year mark, while Portfolio 2 had a time-weighted return of 5.91%.
Nevertheless, the next 10 years was better for the portfolio of individual stocks, with a time-weighted return of 11.5% versus 10.01% for the three funds.
Over the full 20 year period, either portfolio delivers significant growth in wealth, accumulating close to $400,000.
Distribution Phase: Did we run out of money?
In the distribution phase, we took $100,000 and distributed $416 per month, roughly 5% annually. The distribution amount was adjusted up each year to account for inflation. In this case, the differences are stark:
Portfolio 1: Ran out of money in 2014 due to the Dot.com selloff.
Portfolio 2: Still alive and well in 2019, able to support the income distribution.
Here we see the relative importance of diversification during retirement as opposed to the accumulation years. Many investors turned off by the complexity of Wall Street may decide asset allocation doesn’t matter. That stance may work frequently during the accumulation years, but your risks rise appreciably during retirement.