Are you ready for a dive into the deep end of the finance pool? Hold onto your pool noodles, because we’re about to splash around the concept of “regression to the mean” like it’s a Marco Polo game on a hot summer day.
Picture this: the 60:40 portfolio is like that old reliable friend you always went to parties with in college. They were usually a good time (consistent returns), but last year they had a major party foul (a 23.4% loss). They tripped over the keg, spilled their drink all over the host, and broke a priceless family heirloom (if those happened to be represented by the Vanguard Total Stock Market ETF and the Vanguard Long-Term Treasury ETF, of course). Not their finest hour, and certainly not their norm.
But hold the phone, because 2023 is turning out to be quite the comeback tour for our friend. As of the end of May, they’re turning heads and impressing the crowd with a stellar annualized pace of 17.6% – a major glow-up from their historic average return of 7.7% since 1793. It’s like they aced their mid-terms after weeks of partying. Impressive, right?
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Now, before you start thinking they’re the life of every party, remember this: ‘Regression to the mean’ is as relentless as your mom asking when you’re going to settle down and get married. It basically means that over time, super impressive performance is likely to settle back down to average – kind of like how all-nighters become less appealing once you’re out of college.
So, while our friend the 60:40 portfolio is hitting it out of the park this year, that doesn’t mean it’ll keep this pace up. Heck, it might even lose a bit of steam next year.
Remember, the 60:40 portfolio isn’t some slick player you’re trying to time for maximum gain. It’s more like that long-term, steady relationship where the attraction doesn’t burn bright and extinguish fast, but instead, lasts over the years. Just look at its trailing 20-year annualized return – it’s practically snuggled up with its two-century average of 7.7%.
So, should you be excited about the 60:40’s recent glow-up? Sure, it’s great news for now! But always remember, investing isn’t a sprint; it’s a marathon (or a very, very long Netflix binge). The market might be a rollercoaster of ups and downs, but your plans should be more ‘chill on the couch with a good book’. And if you’re ever in doubt, we’re here to help guide you through it.
Until next time, keep your financial chill, Wellthi fam.