The plot below compares the growth of a hypothetical $100,000 invested in our portfolio and the SP500 index (actually the Vanguard SP500 index fund) with re-invested dividends. Also shown is our absolute benchmark of a 5.5% real annualized rate of return; this time series is calculated by multiplying the previous year’s value by (1+0.055)(1+DeltaCPI), where DeltaCPI is the change in the consumer price index over the year. 5.5% is the real geometric rate of return of the SP500 over the last 60 years with the effects of the change in PE multiple factored out. The portfolio market value time series is calculated by multiplying the previous year’s ending value by the one plus the portfolio’s internal rate of return. The internal rate of return compensates for portfolio contributions and withdrawals, and will be higher than the actual realized return in a year with net withdrawals and lower than the actual realized return in a year with net contributions (the actual realized return would be calculated as EndingValue / StartingValue -1).
Up until mid year 2008, the portfolio was invested in, on average, 85% equities and 15% short-term bonds. After that time (and during the market crash in Fall 2008), the portfolio has been invested 100% in equities.
