Searching for the Perfect Portfolio – Part 4

pikachuIn the first three part of the series it became quite clear that a portfolio consisting solely (or at least heavily) stocks provides the highest long term return, besides of the potentially serious deep dives during the investment period. Is it safe to say that if we want to perform the best during the first, wealth accumulation phase of our early retirement plan, we should invest all/most of our assets in equities? And if yes, is it true under every circumstances? What if the economy isn’t doing well for a long time? What if we are facing long periods of deflation? What if less and less people work in the economy? What if we were… Japanese?

History is telling us that stocks have a long term return of around 7% above inflation. Of course this figure doesn’t come from yearly 6, 7, 8% returns. The stock markets can be very volatile, but long term investors can live with this volatility because of the higher returns. But sometimes you can get totally screwed…

If you have invested in Japan in the 70s-80s you could get seriously rich. Everything was about Japan, people thought that they are taking over the world economy.

They were in the papers:


And their stock market also did pretty well:



The late 80s were clearly a bubble, which was caused by many reasons (especially because of the Japanese central bank has forced unsustainable lending growth on commercial banks), but the facts behind that the Nikkei has never got even close to its 1990 peak are even more complex (not only economical but also demographic and cultural). Any deeper analysis on the background is not the purpose of this blog, I was simply interested what would’ve happened to an imaginative early retirement candidate (let’s call him Haruto) if he decided to invest every month USD 2,000 plus any received dividends in the iShares MSCI Japan ETF. Let’s have a look:


Well, if you look at the blue line only, you might say: not too bad! But let’s have a closer look at the two axis. Over 16 years (exactly 202 months) have passed since Haruto’s journey to financial independence and he has invested USD 2,000 per month plus the received dividends. Solely the monthly 2k should result in a 404k portfolio value. Let’s just put that cumulative invested amounts to the chart!


It’s not that impressive if you look like this. His return is just a bit over the total amount of his invested money, furthermore there were many years when this amount was below. These were really wasted years…

I’m not saying that such years are coming for the US or European stock markets. In fact I would be really surprised to see it coming. All I’m saying is that if somebody wants to get prepared for the absolutely worst case scenario, this example is something to consider.

How can we defend ourselves against it? Mainly with diversification. This can mean both geographical diversification (many US and also some European companies already offer a great geographical diversification via their global business scope) and asset diversification (but bear in mind that the higher the bond allocation of the portfolio is, the lower the expected long term returns are).

Finally another interesting question for the end: Is there any market out there recently that might offer potentially exceptional returns over a 10-15 years time frame? Like Japan offered in the 70s-80s? If so, it might make sense to keep a certain percentage of the portfolio in such assets. Something to consider during the search for the perfect portfolio…

You can find the other parts of the Searching for the Perfect Portfolio series under the below links:


Please subscribe to the weekly newsletter and never miss a new post!



(Visited 23 times, 1 visits today)

Leave a Reply