The best thing about keeping a financial blog is the interactions I’m able to have with informed readers.

I’m going to ask for your comments and feedback on this post, to give an American friend of mine a more objective view than mine alone.

Today he brought me his investment account statements, and he asked me to look through them. With interest, I went through his account, which was quite different to many of the accounts I’ve seen in the past. He and his wife are in their late 30s.

Here’s their current allocation:

  • 37.1% equities (mostly individual stocks)
  • 6.9% real estate
  • 35.2% natural resources
  • 4.5% cash and money market funds
  • 16.3% bonds

This is an account managed by a CFP. My friends won’t be receiving a pension when they retire because they teach at a private school. I don’t think I’ve seen an investment account with such a high allocation to natural resources. But I would love to hear your comments. Is it too high?

The account’s inception date is August 19, 2002. This was a wonderful time to lump money into the markets, considering how low the markets were on that date.

According to my friends’ most recent statement, their cumulative return from August 19, 2002 to March 31, 2011 was +84.94% (all stated results will be in U.S. dollars).

It wouldn’t be right to compare my friends’ account with the S&P 500 index because a full U.S. domestic equity index (like the S&P 500) is not a complete portfolio.

But I do find something odd about the way the S&P 500 is reported. My friend’s statement suggests that the S&P 500 index returned a cumulative sum of 39.46% (without dividends) during the duration that my friends have owned the account.

So the comparative results look like this from August 19, 2002 to March 31, 2011:

  • My friends’ account: +84.94%
  • S&P 500 index: +39.46% (not including dividends)

A quick look at and then cross-referenced with the historical prices at reveals a different result for the S&P 500 index.

With reinvested dividends, it returned +65.5% during this time period. (You can see the results here:  Just ensure that you scroll to the specific date requirements: August 19, 2002 to March 31, 2011.)

I am not sure why there’s such a wide discrepancy between the broker’s reported return of the S&P 500 index and the actual returns of the index.

Perhaps it’s a dollar-weighted return, matching deposits into my friends’ account with the same date an equal deposit would be made into the S&P 500. But I have a reason for doubting that because the advisor chose to make the comparison without reinvested dividends for the S&P 500 index. How are you supposed to stop the S&P 500 from paying dividends? It’s well known that the most powerful investment force isn’t the rise of the markets themselves over time. But it’s the power of reinvested dividends that really pack the punch:

Assume a rise in the S&P 500 index based on the 90 year historical average: roughly 9.9%.

How would $10,000 look if it was invested for 90 years with dividends reinvested, and how would it look if dividends were not included in the calculation?

  • $10,000 invested in the S&P 500 for 90 years (not including dividends): $1.89 million
  • $10,000 invested in the S&P 500 for 90 years (including reinvested dividends): $48.95 million

Considering that I have no way of knowing how much my friends deposited into their account (nor during what dates) this might describe part of the index comparison discrepancy. However, it doesn’t explain why the broker didn’t use reinvested dividends when comparing the results over the past 9 years. That’s a bit like comparing the 0-100km/h time of two fast cars, but taking a wheel off one of them before the gun starts.

Do you think the broker made an innocent mistake by not including reinvested dividends for the S&P 500 index?

Regardless, the S&P 500 index is not a complete portfolio.

If a person had split their money between 3 broad index funds, and done nothing (no rebalancing at all) how would they have done from August 19, 2002 to March 31, 2011?

Here are the returns of the following respective indexes during the above time period:

  • Vanguard total U.S. stock market index: +88%
  • Vanguard total international stock market index: +140.1%
  • Vanguard total bond market index: +50%

With 30% in bonds, 35% in the U.S. index and 35% in the international index, such a portfolio would have gained 94.8% during the above time period.

If it was rebalanced annually, it would have done even better. Some money would have been pulled from the stock indexes during the market’s high points in 2006/2007, and it would have been added to bonds. Then when the markets collapsed in 2008/2009, more money would have been added to the stock indexes when stocks were low (some of the bond index would have been sold for this to be possible).

I don’t think it’s a stretch to suggest that the investor would have easily made 100%+ as an overall gain, if the indexed account was rebalanced annually during the period from August 18, 2002 to March 31, 2011.

One of my favourite financial management companies is Assetbuilder. They use indexes available through Dimensional Fund Advisors, and you can see what a rebalanced Assetbuilder account (with 30% bonds) would have done from August 18, 2002 to March 31, 2011, by checking out Portfolio10 at this link.

The cumulative returns would have been +172%.

To be fair, unless I can dollar-weight the comparative returns between my friends’ account and an indexed account, I’ll never have an accurate comparison. I would need to compare exactly what they added to their account, and on what dates. And that comparison would likely take a very long time, if it was possible at all.

My gut instinct suggests that my friends’ broker has done very well (read…he was very lucky) when lumping so much money into natural resources. The vast majority of their gains came from this allocation.

Having said that, despite the strong results that the account yielded, I don’t think that having 35.2% exposure to natural resources was very responsible.

But I’d love to hear what you think.

Here are my questions again, with an added third:

  1. What do you think of such a high allocation to natural resources?
  2. Do you think the broker made an innocent mistake by not including reinvested dividends for the S&P 500 index comparison?
  3. When my friends asked for an estimation of their total expenses, the broker emailed back and estimated that the total fees amount to roughly 1.92% annually. What do you think?