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Asset Class Winners and Losers
 

Asset Class Winners and Losers

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  • Asset class winners and losers It is impossible to predict which asset class will be the best or worst performing in any given year. The performance of any given asset class can have drastic periodic changes. This image illustrates the annual performance of various asset classes in relation to one another. In times when one asset class dominates all others, as was the case for large stocks in the mid-to-late 1990s, it is easy to ignore the fact that historical data shows it is impossible to predict the best performing asset class for any given year. Investors betting on another stellar performance for large stocks in 1999 were certainly disappointed as small stocks rose from the worst performing asset class in 1998 to the best performing in 1999. These types of performance reversals are evident throughout this example. A well-diversified portfolio may allow investors to mitigate some of the risks associated with investing. By investing a portion of a portfolio in a number of different asset classes, portfolio volatility may be reduced. Note: Information shown is illustrative and is not indicative of any specific investment.
  • Stocks, Bonds, Cash, and Inflation: summary statistics 1926–2003 This image summarizes, quantitatively, the risk/return trade-off inherent in investing; that is, the potential return of an asset generally increases with the asset’s risk. The compound annual return shown in the first column reflects the annual rate of return achieved over the entire 78-year time period assuming the reinvestment of all income. It is the average rate of return which, when earned each year, equates the investment’s beginning value with its ending value. The figure in the second column represents a simple, or arithmetic average, of the individual annual returns over the past 78 years. Standard deviation, shown in the third column, is used to measure the risk of an investment. It shows the fluctuation of returns around the arithmetic annual return of the investment. The higher the standard deviation, the greater the variability of the investment returns. The “skyline” or distribution for each asset class graphically depicts the information contained in the summary statistics table. Riskier assets, such as stocks, have spread out “skylines,” reflecting the broad distribution of returns from very poor to very good. Less risky assets, such as bonds, have narrow “skylines,” indicating a tight distribution of returns around the average. Note: Information shown is illustrative and is not indicative of any specific investment.
  • Stocks, Bonds, Cash, and Inflation ® 1925–2003 A 78-year examination of past capital market returns provides historical insight into the performance characteristics of various asset classes. This graph illustrates the hypothetical growth of a $1 investment in four traditional asset classes, as well as inflation, over the time period December 31, 1925 through December 31, 2003. Large and small company stocks have provided the largest increase in wealth over the past 78 years. The fixed-income investments provided only a fraction of the growth provided by stocks. As illustrated in this image, stocks produced greater returns and a higher ending wealth value than that of fixed-income investments. However, these higher returns are associated with much greater volatility (risk). Furthermore, small company stocks may be subject to a higher degree of market risk than large company stocks. Note: Information shown is illustrative and is not indicative of any specific investment.
  • Stocks and bonds: risk versus return 1970–2003 An efficient frontier represents every possible combination of assets that maximizes return at each level of portfolio risk and minimizes risk at each level of portfolio return. An efficient frontier is the line that connects all optimal portfolios across all levels of risk. An optimal portfolio is simply the mix of assets that maximizes portfolio return at a given risk level. This image illustrates an efficient frontier for all combinations of two asset classes: stocks and bonds. Although bonds are considered less risky than stocks, the Minimum Risk Portfolio does not consist entirely of bonds. The reason is because stocks and bonds are not highly correlated; that is, they tend to move independently of each other. Sometimes stock returns may be up while bond returns are down, and vice versa. These offsetting movements help to reduce overall portfolio volatility (risk). As a result, adding just a small amount of stocks to an all-bond portfolio actually helps reduce the overall risk of the portfolio. However, including more stocks beyond this point caused both the risk and return of the portfolio to increase. Note: Information shown is illustrative and is not indicative of any specific investment.
  • Reduction of risk over time 1926–2003 One of the main factors you should consider when investing is the amount of risk, or volatility, you are prepared to assume. However, recognize that, on an annualized basis, returns appear less volatile with longer holding periods . Over the long term, periods of high returns tend to offset periods of low returns. With the passage of time, these offsetting periods result in the dispersion of returns gravitating or converging toward the average. In other words, while returns may fluctuate widely from year to year, holding the asset for longer periods of time results in apparent decreased volatility. This graph illustrates the range of compound annual returns for stocks, bonds, and cash over 1-, 5-, and 20-year holding periods. On an annual basis since 1926, the returns of large company stocks have ranged from a high of 54% to a low of –43%. For longer holding periods of five or 20 years, however, the picture changes. The average returns range from 29% to –12% over five-year periods, and between 18% and 3% over 20-year periods. Note: Information shown is illustrative and is not indicative of any specific investment. .
  • Potential to reduce risk or increase return 1970–2003 Adding stocks to a portfolio of less volatile assets can help reduce risk without sacrificing return or help increase return without assuming additional risk. This image illustrates the risk-and-return profiles of three hypothetical investment portfolios. The lower risk portfolio, which included stocks, had the same return as the portfolio comprised entirely of fixed-income investments, but assumed less risk. The higher return portfolio had the same risk level as the fixed income portfolio, but produced an increased return. Although it may appear counterintuitive, diversifying a portfolio of fixed-income investments to include stocks can help reduce the overall volatility your portfolio experiences. Likewise, it is possible to increase your overall portfolio return without having to take on additional risk. Because stocks, bonds, and cash generally do not react identically to the same economic or market stimulus, combining these assets can often produce a more appealing risk-and-return trade-off. Note: Information shown is illustrative and is not indicative of any specific investment.
  • Diversified portfolios and bear markets Diversification can help limit your losses during a severe market decline. The benefits of diversification are most evident during bear markets. This image illustrates the growth of stocks versus a diversified portfolio during two of the worst performance periods in recent history. The blue line illustrates the hypothetical growth of $1,000 invested in stocks during the mid-1970s recession and the 1987 market crash. The yellow line illustrates the hypothetical growth of $1,000 invested in a diversified portfolio of 35% stocks, 40% bonds, and 25% cash during these same two periods. Over the course of both time periods, the diversified portfolio lost less than the pure stock portfolio. Over longer periods of time, the more volatile single asset-class portfolio is likely to outperform the less volatile diversified portfolio. However, you should keep in mind that one of the main advantages of diversification is reducing risk, not necessarily increasing return, over the long run. Note: Information shown is illustrative and is not indicative of any specific investment.
  • Bond market performance 1925–2003 Although bonds have not been the leading asset class for wealth accumulation, they have provided relatively stable returns over the past 78 years. This image illustrates the hypothetical growth of a $1 investment in stocks, corporate bonds, government bonds, municipal bonds, and cash over the period December 31, 1925 through December 31, 2003. In accordance with their higher risk (due to risk of default), corporate bonds outperformed government bonds and Treasury bills. When compared to the ending wealth of stocks, however, corporate bonds fell short. Though municipal bonds underperformed other bonds and stocks, the income they generate is usually exempt from federal income taxes. Historically, bonds have not proven to be the best investment vehicle for long-term growth. However, there have been short periods of time when bonds have outperformed stocks, such as the mid-70s recession. For this reason, bonds can provide excellent diversification benefits. Note: Information shown is illustrative and is not indicative of any specific investment.
  • Relationship between bond prices and yields It is important for investors to understand the inverse relationship between bond prices and their respective yields. Although the bond market is less volatile than the stock market, bonds also fluctuate in terms of price. This image illustrates the inverse relationship between bond prices and bond yields, or interest rates. If interest rates fall, bond prices rise. If interest rates rise, bond prices fall. A simple example illustrates this concept. Suppose an investor purchases a 20-year $1,000 bond with a yield of 8% and interest payable annually at year-end. One year later, interest rates rise to 10%. Anybody in the market for a bond can now buy one with a yield of 10%. If the investor tried to sell the bond with an 8% yield for the original price of $1,000, nobody would buy it—the same amount of money could purchase a bond yielding 10%. In order to find a buyer, the investor would need to discount the bond price enough to compensate the buyer for the lower interest or coupon payments (10% – 8% = 2% less per year in interest payments). This would result in a capital loss. Conversely, if interest rates fall, the investor would experience a capital gain. Again, this is due to the inverse relationship between bond prices and yields. Note: Information shown is illustrative and is not indicative of any specific investment.
  • Stock performance during recessions 1945–2003 Since the stock market is driven by the performance of corporations, it is evident that a relationship exists between the performance of the stock market and the performance of the economy as a whole. There is no doubt that the state of the economy has a direct influence on stock market performance. This image illustrates the hypothetical growth of a $1 investment in stock at year-end 1945 through December 31, 2003. The shaded regions represent ten economic recessions in the U.S. since year-end 1945. Notice that the index line usually drops either before or in the middle of each shaded region. This indicates a clear relationship between the performance of stocks and the economy as a whole. Not every stock market downturn corresponded with an economic recession. For example, sharp stock market drops in 1962, 1966, and 1987 did not coincide with economic decline. Conversely, the U.S. economy remained stagnant for much of 1991, while the stock market posted impressive returns. Note: Information shown is illustrative and is not indicative of any specific investment.
  • Stocks and Real Assets 1983–2003 International stocks, real estate, commodities, and gold have traditionally served to lower the overall risk of a domestic portfolio. This image illustrates the hypothetical growth of a $1 investment in U.S. stocks, international stocks, commodities, real estate, and gold over the time period December 31, 1983 to December 31, 2003. The best performing asset class over this 20-year period was U.S. stocks, with $1 growing to approximately $11. International stocks, commodities, real estate, and gold are often overlooked in an investor’s asset allocation decision. These assets can be excellent vehicles for diversification purposes, because their returns have demonstrated low or even negative correlation with more traditional assets. In other words, when traditional assets have done poorly, these alternative assets may have done well, thereby helping to reduce the overall volatility (risk) of your portfolio. Commodities, real estate, and gold can also be an effective hedge against rising inflation rates. Note: Information shown is illustrative and is not indicative of any specific investment.
  • Returns before and after Inflation 1926–2003 Comparing the returns of different asset classes both before and after inflation is helpful in understanding why it is so important to consider inflation when making long-term investment decisions. This image illustrates the compound annual returns of three asset classes before and after considering the effects of inflation. Over the past 78 years, inflation has dramatically reduced the returns of stocks, bonds, and cash. The blue, yellow, and green bars represent the nominal, or unadjusted, returns of each asset class. Nominal returns do not consider inflation. It is often the rate of return that you might think of when discussing the returns on investments. The purple bars illustrate the real, or inflation-adjusted, returns of each asset class. Real returns reflect purchasing power. For example, if you invested in cash equivalents in 1926, the money you earned over the period provided you with very little purchasing power today. Notice that cash and bonds, after adjusting for inflation, barely kept pace with the rise in prices over the past 78 years. Note: Information shown is illustrative and is not indicative of any specific investment.
  • Dollar Cost Averaging Dollar cost averaging can be an effective method of turning market volatility into opportunity. Investing the same dollar amount each period will buy more shares of an asset when the price is low, and fewer when the price is high. As a result, the average purchase price is lower than the average market price over the same period. A major benefit of dollar cost averaging is that it brings a discipline to investing that most investors find difficult to achieve. It forces investors to make systematic, timely investments in differing market environments and prevents emotions from dictating investment decisions. Because you invest by the dollar’s worth instead of the number of shares, a market decline presents an opportunity to purchase more shares at favorable prices. The graph shows exactly how dollar cost averaging works: you buy more shares as the price per share falls, and fewer as the price increases. In this example, an investor who systematically invests $600 for four quarters in a mutual fund owns 114 shares after a total investment of $2,400. The average price per share over the four quarters was $22.50, but the average cost to the investor using dollar cost averaging was only $21.05. This amounts to a savings of $1.45 per share, or $165.30 overall. As long as you purchase shares at a regular time interval and with the same dollar amount, you can achieve the benefits of dollar cost averaging. Quarter Price/unit Units purchased Market average price* Dollar cost average price* 1 $20.00 30 $20.00 $20.00 2 $15.00 40 $17.50 $17.14 3 $25.00 24 $20.00 $19.15 4 $30.00 20 $22.50 $21.05 Total units purchased Total market price of units Total dollar cost average price of units 114 (114 x $22.50) = $2,565 (114 x $21.05) = $2,400 *Cumulative average price Note: Information shown is illustrative and is not indicative of any specific investment. Dollar cost averaging does not ensure a profit nor protect against a loss in declining markets. Dollar cost averaging involves continuous investment regardless of fluctuating prices. Investors should consider their financial ability to continue purchases through periods of low price levels.
  • Dangers of market timing 1983–2003 Investors who attempt to time the market run the risk of missing periods of exceptional returns. This practice may have a negative effect on a sound investment strategy. This image illustrates the risk of attempting to time the stock market over the past 20 years. A hypothetical $1 investment in stocks invested at year-end 1983 grew to $11.50 by year-end 2003. However, that same $1 investment would have only grown to $2.71 had it missed the 16 best months of stock returns. A one dollar cash investment over the 20-year period resulted in an ending wealth value of $2.79. An unsuccessful market timer, missing the 16 best months of stock returns, would have received a return that was lower than Cash. Although successful market timing may improve portfolio performance, it is very difficult to time the market consistently. In addition, unsuccessful market timing can lead to a significant opportunity loss. Note: Information shown is illustrative and is not indicative of any specific investment.
  • Dangers of market timing 1925–2003 Investors who attempt to time the market run the risk of missing periods of exceptional returns. This practice may have a negative effect on a sound investment strategy. This image illustrates the risk of attempting to time the stock market over the past 78 years. A hypothetical $1 investment in stocks invested at year-end 1925 grew to $2,285 by year-end 2003. However, that same $1 investment would have only grown to $17.42 had it missed the 37 best months of stock returns. One dollar invested in Cash over the 78-year period resulted in an ending wealth value of $17.66. An unsuccessful market timer, missing the 35 best months of stock returns, would have received a return that was lower than Cash. Although successful market timing may improve portfolio performance, it is very difficult to time the market consistently. In addition, unsuccessful market timing can lead to a significant opportunity loss. Note: Information shown is illustrative and is not indicative of any specific investment.

Asset Class Winners and Losers Asset Class Winners and Losers Presentation Transcript

  • Asset Class Winners and Losers Illustration of the annual performance of various asset classes in relation to one another. This chart is for illustrative purposes only. It does not reflect the performance of any specific investment. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Small Company Stocks—Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Large Company Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; International Stocks—Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE ® ) Index; Government Bonds—20-year U.S. Government Bond; Treasury Bills—30-day U.S. Treasury Bill. Indexes are unmanaged. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] 1998 1990 1991 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 1989 2003 LT gov’t bonds Small stocks LT gov’t bonds 30 day T-bills LT gov’t bonds Highest return Lowest return Internat’l stocks Large stocks LT gov’t bonds Large stocks LT gov’t bonds Large stocks LT gov’t bonds Large stocks LT gov’t bonds LT gov’t bonds Internat’l stocks LT gov’t bonds Large stocks Internat’l stocks Large stocks Internat’l stocks LT gov’t bonds 30 day T-bills 30 day T-bills 30 day T-bills 30 day T-bills 30 day T-bills 30 day T-bills LT gov’t bonds Internat’l stocks Small stocks Small stocks Small stocks Small stocks Small stocks Small stocks LT gov’t bonds Large stocks Internat’l stocks Small stocks Small stocks Large stocks LT gov’t bonds 30 day T-bills Internat’l stocks Internat’l stocks 30 day T-bills Small stocks Internat’l stocks Large stocks Internat’l stocks Small stocks Internat’l stocks Large stocks 30 day T-bills Internat’l stocks
  • Analysis of Worst Performance of Merrill Lynch Asset Allocation Models Over 12-, 24- and 36-Month Periods, 1970 – 2003 Bonds Cash Stocks Capital Preservation Income Income/ Growth Growth Aggressive Growth Merrill Lynch Asset Allocation Models Worst Performance Over a 12-month period Worst Performance Over a 24-Month Period Worst Performance Over a 36-Month period -11.97% -18.56% -22.55% -27.49% -32.19% -4.86% -8.72% -11.11% -14.04% -17.66% -0.92% -3.11% -4.47% -7.50% -11.53% 12-, 24- and 36-Month Periods, 1970–2003 Returns shown are based on indexes and are illustrative; they assume reinvestment of income, no transaction costs or taxes, and that the allocation for each model remained consistent. The allocation models shown are current as of 1/2004. Merrill Lynch has changed the models in the past and may do so in the future. Past performance does not guarantee future results. Index sources: Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Bonds—20-Year U.S. Government Bond; Cash—30-Day U.S. Treasury Bill. Direct investment cannot be made in an index. Source: Merrill Lynch Investment Strategy and Product Group/Strategic Planning. ©2002 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] 25 15 10 10 10 10 50 45 25 40 25 40 50 80 65
  • Annual Returns of Merrill Lynch Asset Allocation Models 637 Twelve-Month Rolling Periods, 1950–2003 Results shown are based on indexes and are illustrative; they assume reinvestment of income, no transaction costs or taxes, and that the allocation for each model remained consistent. The allocation models shown are current as of 1/2004. Merrill Lynch has changed the models in the past and may do so in the future. Past performance does not guarantee future results. Index sources: Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Bonds—20-Year U.S. Government Bond; Cash—30-Day U.S. Treasury Bill. Direct investment cannot be made in an index. Source: Merrill Lynch Investment Strategy and Product Group/Strategic Planning. ©2002 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] Income Income/Growth Growth 37.48% 7.72% -11.97% 40.05% 8.83% -18.56% 43.74% 9.55% -22.55% 47.93% 10.53% -27.49% 52.16% 11.53% -32.19% Asset Allocation: Bonds Cash Stocks 25 25 50 40 15 45 50 10 40 65 10 25 80 10 10 Capital Preservation Aggressive Growth Best Annual Return Average Annual Return Worst Annual Return
  • Stocks, Bonds, Cash and Inflation
    • Although stocks on average performed the strongest historically, they were subject to the greatest variance in annual returns.
    Summary Statistics 1926–2003 Large Company Stocks Government Bonds 5.4% 9.4% Inflation 3.0% 4.3% Cash 3.7% 3.1% Compound Annual Return Risk (Standard Deviation) Distribution of Annual Returns Small Company Stocks 12.7% 33.3% * 5.8% 3.1% 3.8% Arithmetic Annual Return 17.5% *The 1933 small company stock total return was 142.9%. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Large Company Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Small Company Stocks—represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the Dimensional Fund Advisors (DFA) Small company Fund thereafter; Government Bonds—20-year U.S. Government Bond; Cash—30-day U.S. Treasury Bill; Inflation—Consumer Price Index. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] 10.4% 12.4% 20.4%
  • Stocks, Bonds, Cash and Inflation
    • Asset types perform differently, with stocks historically outperforming other asset categories. Note that risk and return are related; the higher the return, the greater the risk.
    1925–2003 Ending Wealth Average Return Hypothetical value of $1 invested at year-end 1925. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Small Company Stocks—represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Large Company Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Government Bonds—20-year U.S. Government Bond; Cash—30 day U.S. Treasury Bill; Inflation—Consumer Price Index. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] $10 3.0% Inflation $.10 $1 $10 $1,000 $10,000 $20,000 1925 1935 1945 1955 1965 1975 1985 2003 $100 1995 $18 3.7% Treasury bills $61 5.4% Government bonds 10.4% $2,285 Large company stocks $10,954 12.7% Small company stocks
  • Stocks and Bonds: Risk Versus Return
    • By investing in a mix of stocks and bonds, you can optimize risk and return.
    1970–2003 9% 10% 11% 12% 13% 10% 11% 13% 15% 16% 17% 18% 100% bonds 25% 75% – Minimum risk portfolio 50% 50% 60% 40% 80% 20% Maximum risk portfolio – 100% stocks Risk Return 12% 14% Risk is measured by standard deviation. Return is measured by arithmetic mean. Risk and return shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Bonds—20-year U.S. Government Bond. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
  • Reduction of Risk Over Time
    • Each bar shows the range of compound annual returns for each asset class over the period 1926 – 2003.
    -75% -50% -25% 0% 25% 50% 75% 100% 125% 150% 10.4% 12.7% 5.4% 3.7% Small Company Stocks Large Company Stocks Government Bonds Cash 5-Year Holding Periods 1-Year Holding Periods 20-Year Holding Periods Compound Annual Return 1926–2003 Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Small Company Stocks—represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Large Company Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Government Bonds—20-year U.S. Government Bond; Cash—30-day U.S. Treasury Bill. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
  • Potential to Reduce Risk or Increase Return
    • A change in diversification strategy can improve returns without increasing risk.
    1970–2003 Risk is measured by standard deviation. Risk and return shown are based on indexes and are illustrative; they assume reinvestment of income, no transaction costs or taxes, and that the allocation for each portfolio remained consistent. Past performance is no guarantee of future results. Index source: Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Bonds—20-year U.S. Government Bond; Cash—30-day U.S. Treasury Bill. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] Fixed income portfolio Return Risk 8.6% 7.8% Bonds 85% Cash 15% Return Risk 8.6% 5.7% Bonds 37% Stocks 21% Cash 42% Lower risk portfolio Higher return portfolio Return Risk 9.4% 7.8% Bonds 37% Stocks 35% Cash 28%
  • Diversified Portfolios and Bear Markets Mid-1970s Recession $1,149 $1,014 Jun 1976 $500 $1,000 $1,500 Dec 1972 Dec 1973 Dec 1974 Diversified portfolio Stocks Diversified portfolios historically perform better through recessions. 1987 Market Crash Dec 1990 $500 $1,000 $1,500 Jun 1987 Jun 1988 Jun 1989 $1,324 $1,227 Diversified portfolio Stocks Diversified portfolios also historically perform better through bear markets. Mid-1970s Recession: December 1972 through June 1976. 1987 Market Crash: June 1987 through December 1990. Diversified Portfolio: 35% stocks, 40% bonds, 25% cash. Hypothetical value of $1,000 invested at month-end December 1972 and June 1987, respectively. Diversification does not eliminate risk of experiencing investment losses. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Bonds—20-year U.S. Government Bond; Cash—30-day U.S. Treasury Bill. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
  • Bond Market Performance
    • Bonds typically carry less risk, but on average have not performed as well as stocks historically.
    1925–2003 Average Return Ending Wealth Hypothetical value of $1 invested at year-end 1925. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and is considered to be representative of the stock market in general; Corporate Bonds—Salomon Brothers Long-Term High-Grade Corporate Bond Index; Government Bonds—20-year U.S. Government Bond; Municipal Bonds—1926–1984, 20-year prime issues from Salomon Brothers’ Analytical Record of Yields and Yield Spreads and Moody’s Bond Record thereafter; Cash—30-day U.S. Treasury Bill. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] $.10 $1 $10 $100 $1,000 $10,000 1925 1935 1945 1955 1965 1975 1985 2003 3.7% $17.66 Treasury bills 1995 4.4% $27.71 Municipal bonds 5.4% $60.56 Government bonds 5.9% $86.82 Corporate bonds 10.4% $2,285 Stocks
  • Relationship Between Bond Prices and Yields
    • When yields increase, bond prices decrease.
    Price and yield are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index source: Government Bond—20-year U.S. Government Bond. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] $0 $.20 $.40 $.60 $.80 $1.00 $1.20 $1.40 $1.60 1925 1935 1945 1955 1965 1975 1985 2003 0% 2% 4% 6% 8% 10% 12% 14% 16% Bond yields (%) Bond prices ($) 1995
  • Stock Performance During Recessions
    • Although stocks dip through recessions, they typically recover and perform better than before.
    1945–2003 Hypothetical value of $1 invested at year-end 1945. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Recessions—National Bureau of Economic Research. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] 1949 1954 1958 1960 1970 1974 1980 1982 1990 2001 $1 $10 $100 $.10 $1,000 1945 1955 1965 1975 1985 2003 1995 Shaded regions denote economic recessions
  • Stocks and Real Assets
    • Over the past 20 years, stocks on average have outperformed most real assets.
    1983–2003 Hypothetical value of $1 invested at year-end 1983. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources : U.S. Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; International Stocks—Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE ® ) Index; Commodities—Goldman Sachs Commodity Index; Real Estate—NCREIF Property Index; Gold—1977–1987, Federal Reserve (2nd London fix), Wall Street Journal London P.M. closing price thereafter. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] $1.10 Ending wealth $8.26 $11.50 $4.28 $5.91 Average return 0.5% 11.1% 13.0% 7.5% 9.3% Gold International stocks U.S. stocks Real estate Commodities $.10 $1 $10 $100 1983 1987 1991 1995 1999 2003
  • Returns Before and After Inflation
    • The following chart illustrates the impact of inflation on performance.
    Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and is considered to be representative of the stock market in general; Bonds—20-year U.S. Government Bond; Cash—U.S. 30-day Treasury Bill; Inflation—Consumer Price Index. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] 1926–2003 Compound Annual Return Bonds Cash 10.4% 5.4% 3.7% Stocks 7.2% 2.3% 0.7% 0% 4% 8% 12% 10% 6% 2% Before Inflation After Inflation
  • Dollar Cost Averaging
    • Dollar cost averaging creates opportunities to lower the average cost per share.
    0 10 20 30 40 50 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Units $0 $10.00 $20.00 $30.00 $40.00 Price/Unit $22.50 $21.05 Average share price DCA price Number of units Price Hypothetical illustration of a $600 quarterly investment. Dollar cost averaging does not ensure a profit or protect against a loss in declining markets. Dollar cost averaging involves continuous investment regardless of fluctuating prices. Investors should consider their financial ability to continue purchases through periods of low price levels. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
  • Dangers of Market Timing
    • Market timing can be an unreliable and hazardous practice. Missing only a fraction of time can have a profound impact on value.
    $11.50 $2.71 $2.79 $0 $5 $10 $15 S&P 500 S&P 500 minus best 17 months Cash Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: S&P 500—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Cash—30-day U.S. Treasury Bill. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] Hypothetical Value of $1 Invested From Year-End 1983–2003
  • Long-Term Dangers of Market Timing
    • The impact of mistakes in market timing are more apparent when viewed over the long term.
    Hypothetical Value of $1 Invested From Year-End 1925–2003 Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: S&P 500—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Cash—30-day U.S. Treasury Bill. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] $2,285 $17.42 $17.66 $0 $500 $1,000 $1,500 $2,000 S&P 500 S&P 500 minus best 37 months Cash $2,500