The Randomness of Returns
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This document contains annual return data from 1995 to 2009 for various asset classes and model portfolios. It shows that the model portfolios had average annual returns ranging from 6.92% to 8.58% over this period, with annual standard deviations of returns between 12.37% to 13.84%. The highest annual return for the model portfolios was 34.81% while the lowest was -24.93%.
The Randomness of Returns
- 1. S1030.7 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 40.09 37.05 36.94 28.58 66.42 31.04 40.59 7.62 74.48 35.14 34.54 35.97 39.78 8.83 79.02 37.58 22.96 33.75 23.11 33.01 8.96 18.04 5.11 69.18 33.16 24.13 32.99 8.16 6.60 70.19 30.63 22.36 33.36 11.95 30.16 8.28 12.35 3.82 66.79 32.11 22.63 32.59 8.04 4.75 51.48 26.66 19.97 25.79 10.24 28.41 7.33 8.44 3.58 60.25 30.58 15.10 27.54 6.35 -37.00 47.81 13.39 17.43 19.66 9.69 21.51 4.01 7.28 3.39 57.81 27.33 13.82 26.32 6.31 -38.64 47.02 12.71 10.23 7.27 8.41 21.04 -2.01 6.44 -2.85 56.26 25.95 9.70 21.87 6.24 -39.20 44.83 12.24 7.67 7.12 7.75 6.99 -3.08 -2.37 -6.00 36.43 19.15 5.61 21.70 5.95 -42.54 37.51 10.32 6.04 5.93 5.91 4.37 -6.40 -2.71 -11.72 36.18 17.74 4.91 17.08 5.49 -44.49 28.46 7.92 5.49 0.39 -2.33 4.04 -9.10 -6.48 -13.84 28.69 10.88 4.45 15.80 -2.61 -45.12 26.46 3.96 4.54 -11.59 -10.04 3.55 -12.26 -11.89 -19.87 2.04 2.65 3.08 4.32 -12.24 -47.11 2.29 0.99 3.49 -14.55 -17.01 1.90 -12.26 -15.41 -22.10 1.95 1.35 2.36 4.09 -17.55 -53.14 0.80 -5.19 2.80 -15.12 -25.33 -2.58 -30.60 -16.75 -30.28 1.47 0.83 1.34 3.75 -18.38 -53.18 0.19 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 US Large Cap 37.58 22.96 33.36 28.58 21.04 -9.10 -11.89 -22.10 28.69 10.88 4.91 15.80 5.49 -37.00 26.46 US Large Cap Value 40.09 19.97 33.75 11.95 6.99 -6.40 -2.71 -30.28 36.43 17.74 9.70 21.87 -12.24 -53.14 37.51 US Small Cap 30.63 17.43 25.79 -2.33 28.41 -12.26 18.04 -19.87 57.81 19.15 5.61 17.08 -2.61 -38.64 47.02 US Small Cap Value 26.66 22.36 36.94 -10.04 4.37 -3.08 40.59 -11.72 74.48 27.33 4.45 21.70 -18.38 -44.49 70.19 US Real Estate 12.24 37.05 19.66 -17.01 -2.58 31.04 12.35 3.58 36.18 33.16 13.82 35.97 -17.55 -39.20 28.46 International Value 10.32 10.23 0.39 23.11 33.01 4.01 -15.41 -13.84 69.18 30.58 15.10 32.99 6.35 -45.12 51.48 International Small Cap 0.99 2.80 -14.55 10.24 30.16 -12.26 -16.75 -2.85 60.25 32.11 22.63 26.32 8.04 -47.11 44.83 International Small Cap Value 3.96 3.49 -15.12 9.69 21.51 -2.01 -6.48 3.82 66.79 35.14 24.13 27.54 6.24 -42.54 47.81 Emerging Markets -5.19 6.04 -11.59 -25.33 66.42 -30.60 -2.37 -6.00 56.26 25.95 34.54 32.59 39.78 -53.18 79.02 One-Year US Fixed 7.92 5.49 5.93 5.91 4.04 7.33 7.28 3.39 1.47 0.83 2.36 4.32 5.95 4.75 0.80 Five-Year US Government Fixed 12.71 4.54 7.12 7.75 1.90 8.96 8.44 7.62 2.04 1.35 1.34 3.75 8.16 8.83 0.19 Five-Year Global Fixed 13.39 7.67 7.27 8.41 3.55 8.28 6.44 5.11 1.95 2.65 3.08 4.09 6.31 6.60 2.29 The Randomness of Returns Annual Return (%) Highest Return Lowest Return In US dollars. US Large Cap is the S&P 500 Index, provided by Standard & Poor’s Index Services Group. US value (ex utilities) and US Small Cap data provided by Fama/French. US Real Estate is the Dow Jones Wilshire REIT Index, provided by Dow Jones Indexes. International Value data provided by Fama/French from Bloomberg and MSCI securities data. International Small Cap data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. International Small Cap Value data compiled by Dimensional from Bloomberg and StyleResearch securities data. Emerging Markets is the MSCI Emerging Markets Index (gross dividends), copyright MSCI 2010, all rights reserved; see MSCI disclosure page for additional information. One-Year US Fixed is the Merrill Lynch One-Year US Treasury Note Index, used with permission; copyright 2010 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Five-Year US Government Fixed is the Barclays Capital Treasury Bond Index 1-5 Years, formerly Lehman Brothers, provided by Barclays Bank PLC. Five-Year Global Fixed is the Citigroup World Government Bond Index 1-5 Years (hedged), copyright 2010 by Citigroup. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
- 2. Model Portfolio: Allocations EQUITY 60% 60% 60% 60% 60% US STOCKS 60% 60% 60% 60% 30% US Large Cap S&P 500 Index 60.0% 60.0% 30.0% 15.0% 7.5% US Large Cap Value Fama/French US Large Cap Value Index1 — — — 15.0% 7.5% US Small Cap Fama/French US Small Cap Index1 — — 30.0% 15.0% 7.5% US Small Cap Value Fama/French US Small Cap Value Index1 — — — 15.0% 7.5% NON-US STOCKS 0% 0% 0% 0% 30% International Large Cap Value Fama/French International Value Index — — — — 15.0% International Small Cap International Small Cap Index — — — — 15.0% FIXED INCOME 40% 40% 40% 40% 40% One-Year US Fixed Merrill Lynch One-Year US Treasury Note Index — 40.0% 40.0% 40.0% 40.0% US Fixed (all maturities) Barclays Capital US Government/Credit Bond Index 1-30+ Years 40.0% — — — — 1. Excludes utilities. The returns and other characteristics of the allocation mixes contained in this presentation are based on model/back-tested simulations to demonstrate broad economic principles. They were achieved with the benefit of hindsight and do not represent actual investment performance. There are limitations inherent in model performance; it does not reflect trading in actual accounts and may not reflect the impact that economic and market factors may have had on an advisor’s decision making if the advisor were managing actual client money. Model performance is hypothetical and is for illustrative purposes only. Model performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses. Clients’ investment returns would be reduced by the advisory fees and other expenses they would incur in the management of their accounts. For illustrative purposes only. The balanced strategies are not recommendations for an actual allocation. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Model Portfolio 5 Model Portfolio 4 Model Portfolio 3 Model Portfolio 2 Model Portfolio 1 S1030.7
- 3. 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 30.24 15.97 23.92 20.93 16.45 -0.62 9.52 -7.45 34.81 15.37 8.45 16.36 6.19 -19.92 28.35 25.72 14.94 22.39 19.51 15.65 -0.73 4.76 -8.85 30.20 11.59 4.64 13.19 5.68 -20.30 27.50 23.63 14.60 21.85 10.24 14.24 -1.69 1.39 -11.24 26.54 9.34 4.10 11.59 3.24 -20.79 22.36 23.41 14.32 20.12 9.48 11.76 -2.53 -3.73 -11.24 19.09 8.21 3.90 11.20 2.46 -24.09 17.69 14.99 10.36 9.99 6.59 10.74 -3.48 -4.22 -11.91 17.80 6.86 3.89 10.99 -1.78 24.93 16.20 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Annualized Return Annual Standard Deviation Model Portfolio 1 30.24 14.94 23.92 20.93 11.76 -0.73 -3.73 -8.85 19.09 8.21 3.90 10.99 6.19 -19.92 17.69 7.76 12.69 Model Portfolio 2 25.72 15.97 22.39 19.51 14.24 -2.53 -4.22 -11.91 17.80 6.86 3.89 11.20 5.68 -20.30 16.20 6.92 12.37 Model Portfolio 3 23.63 14.32 20.12 10.24 16.45 -3.48 4.76 -11.24 26.54 9.34 4.10 11.59 3.24 -20.79 22.36 7.66 12.52 Model Portfolio 4 23.41 14.60 21.85 6.59 10.74 -1.69 9.52 -11.24 30.20 11.59 4.64 13.19 -1.78 -24.09 27.50 7.95 13.84 Model Portfolio 5 14.99 10.36 9.99 9.48 15.65 -0.62 1.39 -7.45 34.81 15.37 8.45 16.36 2.46 -24.93 28.35 8.58 13.60 Model Portfolio: Historical Returns Annual Return (%) Assumes all strategies have been rebalanced quarterly. The S&P data are provided by Standard & Poor’s Index Services Group. Fama/French data provided by Fama/French. International Small Cap data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. MSCI data copyright MSCI 2010, all rights reserved; see MSCI disclosure page for additional information. The Merrill Lynch indices are used with permission; copyright 2010 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Barclays Capital data, formerly Lehman Brothers, provided by Barclays Bank PLC. The returns and other characteristics of the allocation mixes contained in this presentation are based on model/back-tested simulations to demonstrate broad economic principles. They were achieved with the benefit of hindsight and do not represent actual investment performance. There are limitations inherent in model performance; it does not reflect trading in actual accounts and may not reflect the impact that economic and market factors may have had on an advisor’s decision making if the advisor were managing actual client money. Model performance is hypothetical and is for illustrative purposes only. Model performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses. Clients’ investment returns would be reduced by the advisory fees and other expenses they would incur in the management of their accounts. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Lowest Return Highest Return S1030.7
Editor's Notes
- #2: Talking Points: This example features annual performance of major asset classes in the US, international, and emerging markets over a fifteen-year period. • The top chart ranks the annual returns (from highest to lowest) using the colors that correspond to the asset classes. • The bottom chart displays annual performance by asset class. In both US and non-US markets, there is little predictability in asset class performance from one year to the next. Studying the annual data in the slide reveals no obvious pattern in returns that can be exploited for excess profits, strengthening the case for broad diversification across many asset classes.
- #3: Talking Points: Investors need portfolios that reflect their different financial goals, time horizons, and risk preferences. Although there is no "perfect" portfolio, many investors will find that a sensible approach incorporates diversification across multiple sources of risk and return. This slide illustrates how various model portfolios along the risk/return spectrum might be constructed to capture the equity, size, and value risk premiums in global markets. To simplify the illustration, the relative proportion invested in equities remains fixed. The changes across the model portfolios involve diversifying the allocation across a greater number of equity asset classes. This exhibit clarifies the diversification benefits of investing across multiple asset classes within the equity portion of a balanced portfolio.
- #4: Talking Points: Asset class returns vary considerably from year to year, and past returns offer little insight into future performance. However, combining multiple asset classes tends to minimize the volatility associated with this random behavior. Global diversification reduces the effect of a single asset class or market. The historical returns chart offers compelling evidence that structured portfolios are a reliable way to capture the returns associated with multiple measures of risk across the global capital markets. The upper chart ranks the year-to-year returns (from highest to lowest) of the model portfolios using the corresponding colors. The lower chart features historical annual performance of the model portfolios over a fifteen-year period, with the far right columns showing annualized returns and standard deviations for the entire period. The dispersion of colors now appears mostly uniform and consistent, with the more diversified model portfolios prevailing in the majority of one-year time periods. This example illustrates how markets tend to reward investors for the risks they bear, with riskier strategies generally offering higher expected returns.