Portfolio Performance
•
0 likes•601 views
Asset allocation is the process of combining different asset classes like stocks, bonds, and cash to meet investment goals. The document shows historical performance data from 1926-2009 demonstrating that a portfolio with a mix of stocks and bonds had higher returns and lower risks than a 100% stock or bond portfolio. Diversifying across asset classes can help lessen the impact of market swings.
![What is Asset Allocation? ,[object Object],Asset allocation is the process of combining asset classes such as stocks, bonds, and cash in a portfolio in order to meet your goals. Stocks Bonds Cash](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
More Related Content
What's hot
What's hot (20)
Viewers also liked
Similar to Portfolio Performance
Similar to Portfolio Performance (20)
Portfolio Performance
Editor's Notes
- What is Asset Allocation? The asset-allocation decision is one of the most important factors in determining both the return and the risk of an investment portfolio. Asset allocation is the process of developing a diversified investment portfolio by combining different assets in varying proportions. An asset is anything that produces income or can be purchased and sold, such as stocks, bonds, or certificates of deposit (CDs). Asset classes are groupings of assets with similar characteristics and properties. Examples of asset classes are large-company stocks, long-term government bonds, and Treasury bills. Every asset class has distinct characteristics and may perform differently in response to market changes. Therefore, careful consideration must be given to determining which assets you should hold and the amount you should allocate to each asset. Factors that greatly influence the asset-allocation decision are your financial needs and goals, the length of your investment horizon, and your attitude toward risk.
- Long-Term Portfolio Performance An 84-year examination of hypothetical past portfolio returns provides historical insight into the performance characteristics of portfolios with various stock and bond allocations. This graph illustrates the hypothetical growth of a $1 investment in five different portfolios over the time period January 1, 1926, through December 31, 2009. The 100% stock portfolio provided the largest increase in wealth over the past 84 years. The 100% bond portfolio provided only a fraction of the growth provided by the stock portfolio. As illustrated in this image, portfolios with a greater allocation to stocks produced greater returns and higher ending wealth values than portfolios allocated more heavily to bonds. However, these higher returns are associated with much greater volatility (risk). Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. About the data Stocks in this example are represented by the Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the five-year U.S. government bond. An investment cannot be made directly in an index.
- 20-Year Portfolio Performance Examining the past 20 years of hypothetical portfolio returns can provide historical insight into the performance characteristics of portfolios with various stock and bond allocations. This image illustrates the hypothetical growth of a $1 investment in five different portfolios over the time period January 1, 1990, through December 31, 2009. As illustrated in this image, portfolios with a greater allocation to stocks generally produced greater returns and higher ending wealth values than portfolios allocated more heavily to bonds. Portfolios with large stock allocations outperformed portfolios comprised mostly of bonds. However, the higher returns of portfolios with large allocations to stocks are associated with much greater volatility (risk). Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. About the data Stocks in this example are represented by the Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the five-year U.S. government bond. An investment cannot be made directly in an index.
- Portfolio Summary Statistics Asset allocation and length of holding period have an impact on the risk and return of a portfolio. This table shows the compound annual return as well as other performance measures over 12-, 60-, and 120-month rolling periods for different portfolio allocations from 1926–2009. Rolling period returns are a series of overlapping, contiguous periods of returns. For example, when examining 12-month rolling periods, the first rolling period is January 1926–December 1926, the second is February 1926–January 1927, the third is March 1926–February 1927, and so on. Notice that as the stock allocation increases, the returns increase. However, these higher portfolio returns are associated with much greater volatility (risk), as evidenced by the range between highest and lowest returns for each holding period and the percent of periods that were negative. An investor with a long time horizon may be able to deal with short-term volatility in order to receive the higher return opportunities that more aggressive portfolios may provide. Conversely, an investor with short-term goals might seek the relative stability of a conservative approach to help minimize losses. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than bonds. About the data Stocks in this example are represented by the Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the five-year U.S. government bond. An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for taxes or transaction costs.
- Diversification May Lessen the Impact of Market Swings While a 100% stock portfolio has outperformed a 100% bond portfolio in the long term, it has not always been the top performer each year. This image illustrates the annual performance of various portfolios in relation to one another. When one asset class dominates all others, like stocks in the late 1990s, it is easy to ignore the historical data showing that diversified portfolios and bond portfolios may at times outperform a portfolio invested only in stocks. An all-bond portfolio was the best annual performer five times over the past 15 years. The performance of any given portfolio can have drastic periodic changes. Investors betting on another stellar performance for an all-stock portfolio in 2007 were certainly disappointed as the all-bond portfolio rose from the worst performing portfolio in 2006 to the best performing one in 2007 and 2008. In 2009, however, the all-bond portfolio once again fell to the worst performing position. These types of performance reversals are evident throughout history. 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. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. Diversification does not eliminate the risk of experiencing investment losses. About the data Stocks in this example are represented by the Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the five-year U.S. government bond. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.
- Portfolio Risk Appears to Diminish Over Time One of the main factors you should consider when creating a portfolio is the amount of risk, or volatility, you are prepared to assume. However, recognize that the range of returns appears 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 portfolio for longer periods of time results in apparent decreased volatility. This graph illustrates the range of compound annual returns for various portfolios over 12-, 60-, and 120-month holding periods. On a 12-month rolling basis since 1926, the returns of a 50% stock/50% bond portfolio have ranged from a high of 78% to a low of –41%. For longer holding periods of 60 or 120 months, however, the picture changes. The average returns range from 22% to –6% over 60-month periods, and between 16% and 2% over 120-month periods. During the worst 120-month holding period for this hypothetical portfolio since 1926, the portfolio still posted a positive 120-month compound annual return. However, keep in mind that holding stocks for the long term does not ensure a profitable outcome and that investing in stocks always involves risk, including the possibility of losing the entire investment. Although investors can expect more short-term volatility within their portfolio, the risk appears to diminish with time. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while returns and principal invested in stocks are not guaranteed. About the data Stocks in this example are represented by the Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the five-year U.S. government bond. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.
- Stocks and Bonds: Risk Versus Return 1970–2009 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 that 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 reduced the overall risk of the portfolio. However, including more stocks beyond this minimum point caused both the risk and return of the portfolio to increase. Diversification does not eliminate the risk of experiencing investment losses. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than bonds. About the data Stocks in this example are represented by the Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general and bonds by the 20-year U.S. government bond. Risk and return are based on annual data over the period 1970–2009 and are measured by standard deviation and arithmetic mean, respectively. Standard deviation measures the fluctuation of returns around the arithmetic average return of the investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.