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Equities for the Long Term 2014
This document contains multiple charts and graphs showing the historical performance of various asset classes including stocks, bonds, and cash over different time periods from the 1970s to 2014. The key information provided is that stocks have consistently outperformed other asset classes over long periods of time, though they also experience greater short-term volatility. Maintaining a long-term investment strategy with a balanced mix of stocks, bonds, and cash tailored to an individual's risk tolerance provides the best chance of achieving financial goals.
Equities for the Long Term 2014
- 1. Growth of $1.001971-2014 $0.00 $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 $80.00 $90.00 $100.00 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 Stocks 10.7% Bonds 7.7% T-Bills 5.2% CPI 4.2% Long-Term Investors are Rewarded for Taking Risk Source: Russell, Bloomberg, Morningstar
- 2. Growth of $1.001941-1970 $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 Stocks 12.2% Bonds 1.9% T-Bills 2.3% CPI 3.5% Long-Term Favorable Stock Returns is not a Recent Phenomenon Source: Bloomberg, Morningstar
- 3. Earnings Growth DrivesStock Prices S&P 500 vs. Earnings -100 50 200 350 500 650 800 950 1100 1250 1400 1550 1700 1850 2000 2150 2300 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 $0.00 $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 S&P 500 E.P.S. Source: Standard & Poors
- 4. Over Shorter Periods,Stocks and Bonds Can and Have Declined Time Period Stocks Nasdaq Bonds 1973 /74 -48% -58% - 1978/81 - - -6% 1987 -35% -40% - 1990 -21% -27% - 1994 - - -8% 1998 -22% - - 1999 - - -9% 2000/02 -50% -78% - 2007/09 -57% -55% - 2011 -19% -19% - Source: Russell, Bloomberg, Standard & Poors
- 5. Bear Markets areFollowed By Bull Rallies Bear Market Decline 3 Years Following 1929/32 -63% 68% 1937 -34% 16% 1940/41 -22% 79% 1973 /74 -48% 58% 1987 -35% 48% 1990 -21% 55% 2000/02 -50% 54% 2007/09 -57% 86% 2011 -19% 79% Source: Bloomberg, Yahoo Finance
- 6. The “Herd” Tendsto Sell at the Bottom Performance Fund Flows 1994/95 - Bonds - 8% -$50B 1999/00 - Bonds - 9% -$60B 1999/00 - Value -15% -$80B 2001/02 - Growth -60% -$26B 2007/09 – Stocks -57% -$412B Maintaining an Investment Program is Essential to Achieving Investment Objectives Source: Bloomberg, Smith Barney
- 7. A Longer InvestmentTime Horizon Equals a Greater Likelihood of Outperformance 0% 20% 40% 60% 80% 100% 1 Year 5 Years 10 Years 20 Years 30 Years Relative Performance 1931-2014 Stocks Beat Bonds Stocks Beat T-Bills Bonds Beat T-Bills Source: Russell, Bloomberg, Standard & Poors, Morningstar Even Better from 1950
- 8. Volatility Decreases OverTime -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 1YrStocks 5YrStocks 10YrStocks 20YrStocks 30YrStocks 1YrBonds 5YrBonds 10YrBonds 20YrBonds 30YrBonds 1YrT-Bills 5YrT-Bills 10YrT-Bills 20YrT-Bills 30YrT-Bills Average High Low Investment Return Ranges 1930-2014 Source: Russell, Bloomberg. Standard & Poors, Morningstar
- 9. Risk Also DecreasesOver Time Standard Deviation of Investment Returns Over Time 0.00% 5.00% 10.00% 15.00% 20.00% 1 Year 5 Year 10 Year 20 Year 30 Year Stocks Bonds T-Bills Source: Russell, Bloomberg, Standard & Poors, Morningstar
- 10. Stock Return CyclesOver Time Returns Tend to Experience Waves -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 1904 1910 1916 1922 1928 1934 1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012 5-Year 10-Year 20-Year Source: Bloomberg, Standard & Poors, Morningstar
- 11. Performance Cycles areHard to Predict 3.40% 15.20% -12.60% 0.40% -12.30%-11.00% 1.30% -4.60% 4.80% -11.90% 10.70% 7.80% 16.60% -8.80% -15.20% 4.60% -1.20% 1.50% -4.70% 23.10% 25.80% -29.40% -14.77% -12.37% -0.20% -10.00% -1.70% -12.90% 12.00% -1.50% 17.52% 1.20%2.25% -2.25% 0.95% -0.40% -40.00% -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Value Vs. Growth Annual Returns 1979-2009 Returns on Russell 1000 Growth Minus Russell 1000 Value Source: Russell Value Beats Growth Growth Beats Value
- 12. Dow Jones vs.Earning 50 75 100 125 150 175 200 225 250 275 300 325 1921 1922 1923 1924 1925 1926 1927 1928 1929 2 4 6 8 10 12 14 16 18 20 Dow Jones E.P.S. Secular Bull – The Roaring 20’s
- 13. Dow Jones vs.Earnings 50 75 100 125 150 175 200 225 250 275 300 325 350 1929 1931 1933 1935 1937 1939 1941 1943 1945 1947 1949 1951 1953 -1 2 5 8 11 14 17 20 23 26 29 32 35 Dow Jones E.P.S. Consolidation - The Great Depression & WWII
- 14. S&P 500 vs.Earnings 30 40 50 60 70 80 90 100 110 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 2.5 3 3.5 4 4.5 5 5.5 6 6.5 S&P 500 E.P.S. Secular Bull – The Gunsmoke Era
- 15. S&P 500 vs.Earnings 60 70 80 90 100 110 120 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 4 5 6 7 8 9 10 11 12 13 14 15 S&P 500 E.P.S. Consolidation – Stagflation & Oil Embargo
- 16. S&P 500 vs.Earnings 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 10 15 20 25 30 35 40 45 50 55 60 65 70 75 S&P 500 E.P.S. Secular Bull – Consumerism & Tech Bubble
- 17. S&P 500 vs.Earnings 800.00 850.00 900.00 950.00 1,000.00 1,050.00 1,100.00 1,150.00 1,200.00 1,250.00 1,300.00 1,350.00 1,400.00 1,450.00 1,500.00 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 40 45 50 55 60 65 70 75 80 85 90 95 100 S&P 500 E.P.S. Secular Bear – Bursting Bubbles & Financial Crisis
- 18. S&P 500 vs.Earnings 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 2100 2200 2009 2010 2011 2012 2013 2014 50 60 70 80 90 100 110 120 S&P 500 E.P.S. Secular Bull – Monetary Easing and Stimulus
- 19. Small and Mid-CapStocks Have Beaten Large-Caps Over the Long-Term Growth of $1.00 $0.00 $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 $140.00 $160.00 $180.00 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Large Cap 10.5% Mid-Cap 12.5% Small-Cap 11.8% Source: RussellSmall-Caps Have Not Compensate For Higher Risk!
- 20. The Power ofCompounding 1984-2014 $2,551,000 $3,709,000 $2,228,000 $0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 Future Value of $100,000 Large 11.4% Mid 12.8% Small 10.9% Small % Increases = Big Dollars Over Time! Source: Russell
- 21. Smaller Companies CanGrow Faster Smaller Base of Earnings Greater Opportunity for Market Share Gains Emerging Industries Industry Consolidators Entrepreneurial Managements
- 22. The Main DifferenceBetween Mid-Caps and Small-Caps … RISK! Standard Deviation (30 Year) Mid-Cap 18.4% Small-Cap 18.8% Stock Liquidity (Avg. Daily Volume) Mid-Cap 3,000K Small-Cap 500K Profitable Business Models Russell Mid-Cap 11.5% Russell Small-Cap 26.0% Source: Russell, Thomson Financial, as of 2009
- 23. Large Industries BecomeDominated by a Few Quality Companies • Automobiles – Ford, General Motors, Volkswagon, Toyota • Retail – WalMart, Home Depot, Costco • Computing – Apple, Microsoft, Oracle, Cisco, Intel Preference for standards and economies of scale lead to industry consolidation.
- 24. Active vs. PassiveManagement • Active Management = Not an Index Fund •Active management can potentially beat the indexes. •Fees, style and taxes must also be considered. •Most Active Managers do not beat their indexes after fees and taxes. •Active management satisfies the desire to gamble. • Passive Management = Index Funds •Index funds own all of a specific market segment. •Index funds deliver market rates of returns at low cost. •Index funds are generally highly tax efficient. •Index funds allow for diversification by size, style, country, etc. •Index funds beat most active mutual funds over the long- term.
- 25. Evaluating Active Managers Performanceshould be measured net of fees and taxes relative to the proper style index. • Style – Large-cap vs. Large-cap. Mid-Cap vs. Mid- Cap. Value vs. Value. Int’l vs. Int’l. etc. • Net of fees and taxes – You pay fees and taxes. What is left is your real return. • Data Sources for Index/Benchmark Results – Russell.com, Morningstar, Yahoo Finance
- 26. If You ChooseActive Management • Stick with Value or Core Managers, and Low Costs – Value tends to outperform core long-term. Core managers tilt towards growth anyway. • Never invest in Small Cap Growth – It doesn’t even beat the S&P 500. • Small Cap Value however, is Good – The challenge is finding a good one with low fees and small enough to maneuver. • Avoid High Turnover to Reduce Tax Burden. • No Loads! • Data Sources. – Morningstar.com, Yahoo Finance, Value Line
- 27. Don’t Overdiversify! • Benefitscan be obtained with a handful of asset categories. • Cash and Money Markets – Most Conservative, lowest long-term return. • Bonds/Fixed Income – Provides interest income, preserves capital. – Stick with intermediate investment grade (high quality). – Use stocks for risk vs. high yield “junk bonds”. • Equities/Stocks/Mutual Funds/Index Funds/ETF’s – Higher risk, higher return. Returns through capital appreciation. – Requires a long-term strategy. • Int’l Stocks - It only takes a little. – Important for the future as global economy develops. – Stick with Index Funds or ETF’s.
- 28. 29 Years SummaryResults Returns vs. Risk 100 Mix of Stocks/Bonds/Cash 100/0/0 0/100/0 0/0/100 90/0/10 80/15/5 70/25/5 60/35/5 50/45/5 40/55/5 30/65/5 20/75/5 10/85/5 Average Return 12.46% 7.55% 3.77% 11.58% 11.44% 11.05% 10.63% 10.16% 9.68% 9.14% 8.58% 7.99% Std. Deviation 19.2 8.5 2.5 16.3 14.8 13.3 11.9 10.6 9.6 8.7 8.1 7.9 Return/risk 0.65 0.89 1.48 0.71 0.77 0.83 0.89 0.95 1.01 1.05 1.06 1.01 Worst 1 Year Return -42.6% -8.6% 0.1% -36.7% -31.9% -27.3% -22.7% -18.0% -13.4% -8.8% -5.9% -6.4% Worst Absolute 3 Yr Return -23.1% 8.2% 0.4% -18.6% -13.7% -9.2% -5.0% -0.7% 3.3% 7.1% 10.8% 12.1% $100,000 compounded over 29 years, in '000s 3,014$ 825$ 292$ 2,401$ 2,311$ 2,087$ 1,870$ 1,654$ 1,459$ 1,264$ 1,087$ 930$ Note: The stocks component of the allocation consists of 40% Largecap Blend (think S&P 500), 40% Midcap Value index and 20% Emerging Markets index. Stocks within the mixture are rebalanced annually, as are the total portfolios. Bonds are represented by the Barclay’s Capital U.S. Aggregate bond index. Cash is represented using 90 day Treasury Bill returns. For example the 30/65/5 column is 30% stocks (of the above indicated constituents), 65% bonds and 5% cash/T-bills. Even Conservative Investor Should Own Some Equities 30% in Equities Had Higher Returns With Similar Risk Profile to Bonds Only
- 29. Key Variables toRetirement Planning • Required annual income at retirement. – Consider basic needs, healthcare, vacations, hobbies, taxes, etc. • Income sources at retirement (Soc. Sec., consulting, etc.). – Required savings at retirement = 20 to 25 times required pre-tax income from savings. • Years remaining to retirement. • Current savings and continued annual savings. • Required rate of return - determines required risk. • Tools to help calculate: – Quicken, Microsoft Money, Yahoo Finance
- 30. A Little SavingsGoes a Long Way • Assumptions: – Starting Value = $10,000 – Annual Contribution = $5,000 (IRA Limit) • Just over $400 per month. – Annual Rate of Return = 8% • Stock market returned 9.6% last century. – Time Horizon = 25 years • Future Value = $434,000
- 31. What About ETF’s? •ETF’s = Exchange Traded Funds • ETF’s are good low cost ways to index. • ETF’s are bought and sold similar to stocks. • ETF’s make diversification easier. • Brokerage firms do charge commissions on ETF trades, so use a discount broker. • Schwab, Ameritrade, and E-Trade all have low commissions and good information resources. Schwab has branch offices.