JFK University Presentation

Editor's Notes

• #9: While the U.S. stock market is one of the world’s largest, if you invest only in America, you are only getting half (actually 40% ) of the story. From automobile manufacturers to electronics to pharmaceuticals, some of the biggest companies in the world are headquartered outside the United States. By 2050, experts predict the United States will account for only 17% of global market capitalization. In addition, as you can see on the right, international markets and asset classes within those markets have not—historically—moved in unison with the U.S. market. When the U.S. is underperforming, international may outperform…and vice versa. This means that incorporating both international and domestic equities into a portfolio potentially increases diversification and lowers volatility.
• #23: Experience shows that even highly-experienced, highly-compensated mutual fund managers have a hard time beating the market. As you can see, the majority of managers have failed to beat their indices. [Read chart on slide]
• #24: The world may be unstructured, but investing does not have to be. This chart shows the returns (from highest to lowest) for major asset classes over the last two decades. It is impossible to find any kind of pattern or trend in these results. One year an asset class is the top performer, the next year it is the worst. Instead of trying to guess which asset classes will and won’t do well, we believe it is important instead to diversify widely across multiple asset classes.
• #26: This graph documents bull and bear market periods in the S&P 500 Index from January 1, 1926 to March 2010. The market cycles are identified in hindsight using historical cumulative daily returns. All observations are performed after the fact. A bear market is identified in hindsight when the market experiences a negative daily return followed by a cumulative loss of at least 10%. The bear market ends at its low point, which is defined as the day of the greatest negative cumulative return before the reversal. A bull market is defined by data points not considered part of a bear market. The rising trend lines in blue designate the bull markets occurring since 1926, and the falling trend lines in red document the bear markets. The bars that frame the trend lines help to describe the length and intensity of the gains and losses. The numbers above or below the bars indicate the duration (in calendar days) and cumulative return percentage of the bull or bear market. Keep in mind that this graph does not show total compounded returns or growth of wealth since 1926. Once the cycle is established in retrospect, the first day of that cycle resets the performance baseline to zero. Investors may draw a number of lessons from this graph. First, since 1926, bull markets in the S&P 500 Index have lasted longer than bear markets and delivered price gains that are disproportionately greater than the bear market losses. Second, fluctuating performance within each trend illustrates that volatility and uncertainty occur even within established market cycles: bull markets may have short-term dips, and bear markets may have short-term advances. The immediate trend is not readily apparent to market observers, and in fact, may become clear only in hindsight. This illustrates the difficulty of accurately predicting and timing market cycles. Finally, the graph suggests the importance of maintaining a disciplined investment approach that views market events and trends from a long-term perspective. Investors who react emotionally to short-term movements are at risk of making ill-timed decisions that compromise long-term performance.
• #27: Markets throughout the world have a history of rewarding investors for the capital they supply. Their expected returns offer compensation for bearing systematic risk—or risk that cannot be diversified away. An efficient market or equilibrium view assumes that competition in the marketplace quickly drives securities prices to fair value, ensuring that investors can only expect greater average returns by taking greater systematic risk in their portfolios. This graph documents compounded performance of fixed income and equity asset classes from 1926 to 2009, based upon growth of a dollar. It shows that US equities have offered higher compounded returns than fixed income investments. Within the equity asset classes, small cap stocks have outperformed large cap stocks, resulting in higher returns and greater wealth accumulation. Capital markets reward investors based on the risk they assume. Rather than trying to outguess the markets, investors should identify the risks they are willing to take, then position their portfolios to capture these risks through broad diversification in the capital markets.