Magnitude of 12-Month Real Gains

Yesterday’s post explored one facet of risk: The potential magnitude of real losses you would have experienced over different time frames in past years with your stock and bond investments. It pays to know the extremes of bad outcomes you might expect, as that can help you select an appropriate asset allocation; you can then eliminate asset allocations with potential outcomes you simply could not stand.

But why are you looking at just the worst outcomes? What are you, some kind of paranoid? What about the best outcomes? Take a look at the right hand extremes of the charts in yesterday’s post. These endpoints represent the best historical real returns of stocks, bonds, and a 50%-50% mixture over different time frames.

To summarize, here are the historically best aggregate real returns between 1926 and 2008:
Over 12 Months:
Stocks: 182%
Bonds: 26%
50%-50% mixture: 99%

Over 60 Months:
Stocks: 347%
Bonds: 105%
50%-50% mixture: 157%

Over 120 Months:
Stocks: 473%
Bonds: 146%
50%-50% mixture: 216%

Of course, you don’t plan your future by looking at the rosiest outcome. To the contrary. You plan by eliminating options that carry a meaningful likelihood of disastrous results. But it’s instructive to understand the other extreme as well.

Two important caveats: (1) Future outcomes can certainly be worse than any experienced in the past. (2) The growth and shrinkage of your pot of retirement assets is something of a red herring. The right yardstick is the growth and shrinkage of your future annual spending. While the size of your pot is an important key determinant, it’s just a step on the road to what really matters: Your standard of living as reflected in the allowance you allow yourself, given the size of the pot. More to come on this in future posts.