Presentation on the benefits of diversifying into a globally diversified, low-cost portfolio.
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1. The Benefits of a Fully Diversified Portfolio by Charles R.
Korger, CFP
2. Basic 60/40 Balanced Strategy vs. Company Plans Results of
192 Corporate Pension Funds Annual: 19882005 0 2 4 6 8 10 12 14 16
Company1 Company10 Company20 Company30 Company40 Company50
Basic60/40 Company60 Company70 Company80 Company90 Company100
Company110 Company120 Company130 Company140 Company150 Company160
Company170 Company180 Company190 Company192 AnnualAverageReturns(%)
Basic 60/40 is 60% S&P 500 Index, 40% Lehman Brothers US
Government/Credit Bond Index Intermediate, rebalanced monthly.
Source: FutureMetrics (December 2006); all companies with fiscal
year ending December, with complete return data from 19882005. The
S&P data are provided by Standard & Poors Index Services
Group. Barclays Capital data provided by Barclays.
3. The Basic Institutional Portfolio Annualized Compound Return
Annualized Standard Deviation Model Portfolio 1 9.34% 11.14%
Barclays US Govt./Credit Bond Index S&P 500 Index Model
Portfolio 1 40% 60% Quarterly: 19732011 Model Portfolio 1 Barclays
Capital data provided by Barclays Bank PLC. The S&P data are
provided by Standard & Poors Index Services Group. Indexes are
not available for direct investment. Their 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. Returns of model
portfolios are based on back-tested model allocation mixes designed
with the benefit of hindsight and do not represent actual
investment performance. See cover page for additional
information.
4. Does It Pay to Extend Maturities? Extending too far may
result in diminishing returns/risk tradeoff Not all investors
define risk as standard deviation. Some investors may seek to hedge
long-term liabilities using long- term bonds. Historically,
longer-maturity instruments have higher standard deviations than
shorter-maturity instruments. Quarterly: 19642011 Source: One-Month
US Treasury Bills, Five-Year US Treasury Notes, and Twenty-Year
(Long-Term) US Government Bonds provided by Ibbotson Associates.
Six-Month US Treasury Bills provided by CRSP (19641977) and BofA
Merrill Lynch (1978present). One-Year US Treasury Notes provided by
CRSP (1964May 1991) and BofA Merrill Lynch (June 1991present).
Ibbotson data Stocks, Bonds, Bills, and Inflation Yearbook,
Ibbotson Associates, Chicago (annually updated work by Roger G.
Ibbotson and Rex A. Sinquefield). CRSP data provided by the Center
for Research in Security Prices, University of Chicago. The Merrill
Lynch Indices are used with permission; copyright 2012 Merrill
Lynch, Pierce, Fenner & Smith Incorporated; all rights
reserved. Indexes are not available for direct investment. Index
performance does not reflect expenses associated with the
management of an actual portfolio. Past performance is not a
guarantee of future results. Values change frequently and past
performance may not be repeated. There is always the risk that an
investor may lose money. Fixed income securities are subject to
interest rate risk because the prices of fixed income securities
tend to move in the opposite direction of interest rates. In
general, fixed income securities with longer maturities are more
sensitive to these price changes and may experience greater
fluctuation in returns. 0 2 4 6 8 10 12 14 One-Month US Treasury
Bills Six-Month US Treasury Bills One-Year US Treasury Notes
Five-Year US Treasury Notes Twenty-Yea Government Annualized
Compound Returns Annualized Standard Deviation Maturity One-Month
US Treasury Bills Six-Month US Treasury Bills One-Year US Treasury
Notes Five-Year US Treasury Notes Twenty-Year US Govt. Bonds
Annualized Compound Return (%) 5.33 6.07 6.28 7.32 7.77 Annualized
Standard Deviation (%) 1.46 1.80 2.35 6.17 11.51
5. Substituting Short-Term for Long-Term Fixed Income
Annualized Compound Return Annualized Standard Deviation Model
Portfolio 1 9.34% 11.14% Model Portfolio 2 8.65% 10.27% Barclays US
Govt./Credit Bond Index S&P 500 Index BofA Merrill Lynch
One-Year US Treasury Note Index Model Portfolio 1 40% 60% Model
Portfolio 2 60% 40% Barclays Capital data provided by Barclays Bank
PLC. The S&P data are provided by Standard & Poors Index
Services Group. The Merrill Lynch Indices are used with permission;
copyright 2012 Merrill Lynch, Pierce, Fenner & Smith
Incorporated; all rights reserved. Indexes are not available for
direct investment. Their 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. Returns of model portfolios are
based on back-tested model allocation mixes designed with the
benefit of hindsight and so not represent actual investment
performance. See cover page for additional information. Quarterly:
19732011 Model Portfolio 2
6. History of the Size Effect The size effect can persist for
long periods in either direction. These long periods can
immediately be succeeded by a reversal in the opposite direction.
The S&P data are provided by Standard & Poors Index
Services Group. Market cap decile data provided by the Center for
Research in Security Prices, University of Chicago. Indexes are not
available for direct investment. Their performance does not reflect
the expenses associated with the management of an actual portfolio.
0 350 1 S&P 2 3 4 5 6 7 8 9 10 19651968 -75 0 1 S&P 2 3 4 5
6 7 8 9 10 19691974 0 1,400 1 S&P 2 3 4 5 6 7 8 9 10 19751983
-25 175 1 S&P 2 3 4 5 6 7 8 9 10 19841990 TotalReturns(%)
Market Cap Decile Largest Smallest Smallest Largest Smallest Market
Cap Decile Largest Smallest Largest Smallest Market Cap Decile
Largest TotalReturns(%)TotalReturns(%)
7. Diversifying a Portfolio into US Small Cap Stocks Quarterly:
19732011 Model Portfolio 3 Annualized Compound Return Annualized
Standard Deviation Model Portfolio 1 9.34% 11.14% Model Portfolio 2
8.65% 10.27% Model Portfolio 3 9.46% 11.95% Barclays US
Govt./Credit Bond Index S&P 500 Index BofA Merrill Lynch
One-Year US Treasury Note Index US Small Cap Index Model Portfolio
1 40% 60% Model Portfolio 2 60% 40% Model Portfolio 3 30% 40% 30%
Barclays Capital data provided by Barclays Bank PLC. The S&P
data are provided by Standard & Poors Index Services Group. The
Merrill Lynch Indices are used with permission; copyright 2012
Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights
reserved. Dimensional Index data compiled by Dimensional. Indexes
are not available for direct investment. Their 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. Returns of model
portfolios are based on back-tested model allocation mixes designed
with the benefit of hindsight and do not represent actual
investment performance. See cover page for additional
information.
8. Size and Value Effects in the US Annual: 19272011 Annualized
Compound Returns (%) US Large Capitalization Stocks US Small
Capitalization Stocks 11.51 9.75 9.21 14.71 11.47 8.68 Fama/French
US Large Value Index S&P 500 Index Fama/French US Large Growth
Index Fama/French US Small Value Index CRSP 6-10 Small Neutral
Index Fama/French US Small Growth Index Average Return (%) 14.86
11.77 11.22 19.11 15.72 13.29 Standard Deviation (%) 27.02 20.41
20.49 31.73 30.84 33.23 Fama/French data provided by Fama/French.
The S&P data are provided by Standard & Poors Index
Services Group. CRSP data provided by the Center for Research in
Security Prices, University of Chicago. Small company risk:
Securities of small firms are often less liquid than those of large
companies. As a result, small company stocks may fluctuate
relatively more in price. Indexes are not available for direct
investment. Their 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. See cover page for additional
information.
9. Diversifying a Portfolio into US Value Stocks Quarterly:
19732011 Model Portfolio 4 Annualized Compound Return Annualized
Standard Deviation Model Portfolio 1 9.34% 11.14% Model Portfolio 2
8.65% 10.27% Model Portfolio 3 9.46% 11.95% Model Portfolio 4
10.33% 11.94% Barclays US Govt./Credit Bond Index S&P 500 Index
BofA Merrill Lynch One-Year US Treasury Note Index US Small Cap
Index US Large Value Index Targeted Value Index Model Portfolio 1
40% 60% Model Portfolio 2 60% 40% Model Portfolio 3 30% 40% 30%
Model Portfolio 4 15% 40% 15% 15% 15% Barclays Capital data,
formerly Lehman Brothers, provided by Barclays Bank PLC. The
S&P data are provided by Standard & Poors Index Services
Group. The Merrill Lynch Indices are used with permission;
copyright 2012 Merrill Lynch, Pierce, Fenner & Smith
Incorporated; all rights reserved. Dimensional Index data compiled
by Dimensional. Indexes are not available for direct investment.
Their 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. Returns of model portfolios are based on back-tested model
allocation mixes designed with the benefit of hindsight and do not
represent actual investment performance. See cover page for
additional information.
10. Size and Value Effects Abroad Annual: 19752011 Fama/French
International Value Index International Small Cap Index MSCI World
ex USA Index Average Annual Return (%) 17.44 18.23 12.07 Standard
Deviation (%) 24.81 28.32 21.57 Annual Correlation Coefficient to
S&P 500 Index 0.604 0.516 0.660 Annualized Compound Returns (%)
14.69 14.74 10.68 Non-US Developed Markets Stocks Fama/French data
provided by Fama/French from Bloomberg and MSCI securities data.
International Small Cap Index data compiled by Dimensional from
Bloomberg, Style Research, London Business School, and Nomura
Securities data. MSCI data copyright MSCI 2012, all rights
reserved; see MSCI disclosure page for additional information. The
S&P data are provided by Standard & Poors Index Services
Group. Indexes are not available for direct investment. Their
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.
11. A Fully Diversified Portfolio Barclays US Govt./Credit Bond
Index S&P 500 Index BofA Merrill Lynch One-Year US Treasury
Note Index US Small Cap Index US Large Value Index Targeted Value
Index Intl. Large Index Intl. Small Index Intl. Large Value Index
Intl. Small Value Index Emerging Markets Blended Index Model
Portfolio 1 40% 60% Model Portfolio 2 60% 40% Model Portfolio 3 30%
40% 30% Model Portfolio 4 15% 40% 15% 15% 15% Model Portfolio 5
7.5% 40% 7.5% 7.5% 7.5% 6% 6% 6% 6% 6% Quarterly: 1973-2011 Model
Portfolio 5 Annualized Compound Return Annualized Standard
Deviation Model Portfolio 1 9.34% 11.14% Model Portfolio 2 8.65%
10.27% Model Portfolio 3 9.46% 11.95% Model Portfolio 4 10.33%
11.94% Model Portfolio 5 11.15% 11.39% Rebalanced annually.
Barclays Capital data provided by Barclays Bank PLC. The S&P
data are provided by Standard & Poors Index Services Group. The
Merrill Lynch Indices are used with permission; copyright 2012
Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights
reserved. Dimensional Index data compiled by Dimensional. Emerging
Markets Blended Index consists of 50% Fama/French Emerging Markets
Index, 25% Fama/French Emerging Markets Small Cap Index, and 25%
Fama/French Emerging Markets Value Index. Fama/French Emerging
Markets, Fama/French Emerging Markets Value and Fama/French
Emerging Markets Small Cap Index weightings allocated evenly
between Dimensional International Small Cap Index and Fama/French
International Value Index prior to January 1989 data inception.
Dimensional International Small Cap Value Index weighting allocated
to International Small Cap Index prior to July 1981 data inception.
International Value weighting allocated evenly between
International Small Cap and MSCI World ex USA Index prior to
January 1975 data inception. Indexes are not available for direct
investment. Their 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. Returns of model portfolios are
based on back-tested model allocation mixes designed with the
benefit of hindsight and do not represent actual investment
performance. See cover page for additional information.
12. Disclosures This video presentation may include
forward-looking statements. All statements other than statements of
historical fact are forward- looking statements (including words
such as believe, estimate, anticipate, may, will, should, and
expect). Although we believe that the expectations reflected in
such forward-looking statements are reasonable, we can give no
assurance that such expectations will prove to be correct. Various
factors could cause actual results or performance to differ
materially from those discussed in such forward-looking statements.
Views regarding the economy, securities markets or other
specialized areas, like all predictors of future events, cannot be
guaranteed to be accurate and may result in economic loss to the
investor. Any information provided by the Adviser regarding
historical market performance is for illustrative and educational
purposes only. Clients or prospective clients should not assume
that their performance will equal or exceed historical market
results and/or averages. The clients gross performance will be
reduced by advisory and transaction fees. While the Adviser
believes the outside data sources cited to be credible, it has not
independently verified the correctness of any of their inputs or
calculations. Therefore, the Adviser does not make any
representations or warranties as to the accuracy, timeliness,
suitability, completeness, or relevance of any information prepared
by any unaffiliated third party, whether incorporated into or
referenced in the video presentation, and takes no responsibility
therefore. All such information is provided solely for convenience
purposes only and all users thereof should be guided accordingly.
The inclusion of index information is not intended to suggest that
its performance is equivalent or similar to that of the historical
investments whose returns are presented or that investment with our
firm is an absolute alternative to investments in the index (if
such investment were possible). Investors should be aware that the
referenced benchmark funds may have a different composition,
volatility, risk, investment philosophy, holding times, and/or
other investment-related factors that may affect the benchmark
funds ultimate performance results. Therefore, an investors
individual results may vary significantly from the benchmarks
performance. Specific allocation models and investment strategies
are described for illustrative and educational purposes only, may
or may not be utilized in portfolios managed by the Adviser and do
not necessarily encompass all of allocation models and investment
strategies recommended for advisory clients. It should not be
assumed that all of Advisers accounts have the same allocations,
concentrations or performance results.