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The following tables present real (inflation adjusted) returns for our 2006 - 2007 model portfolios, which were formed in 2005. Please keep eight important points in mind when reviewing them.
First, in 2009 we are reviewing our model portfolios, due to both improvements in our methodology (e.g., use of an expanded regime switching model), and the recent availability of new asset classes for investment (e.g., equity volatility). That said, it is still interesting to see how our current model portfolios have performed.
Second, the target return for a model portfolio represents a geometric average real (after inflation) return. We use real returns because that is what matters to an investor's purchasing power. In the tables below, we also present the arithmetic average real return and the standard deviation of real returns.
Third, the actual return from any of our model portfolios depends on your assumptions about when and how the investment was made. In our monthly research journals, we repeatedly stress the importance of not investing new money in asset classes when they are substantially overvalued just to implement a given asset allocation target within a given time frame.
Fourth, these tables make it clear that, regardless of the functional currency, geometric real returns above 5% should be considered very difficult to achieve, particularly if the danger posed by substantial asset class overvaluations is ignored, and active hedging (e.g., moving into liquid assets or buying options) are not undertaken to protect against them.
Fifth, we also present the results for a model portfolio that equally weights all the asset classes we use in our basic portfolios, including real return bonds, domestic investment grade bonds, foreign bonds, domestic commercial property, foreign property, commodities (as measured by the Dow Jones AIG Commodities Index), timber, domestic equity, foreign equity, and emerging markets equity. Our advanced portfolios include allocations to uncorrelated alpha strategies. Due to space limitations we do not show their results here. The equally weighted portfolio is appropriate for an investor who believes it is impossible to forecast (to a degree of accuracy beyond luck) either the return or risk of any asset class. This is admittedly an extreme assumption; while relative returns are indeed very challenging to forecast, the relative riskiness of different asset classes is much more constant over time. Still, the equally weighted portfolio is a very interesting point of comparison for our other model portfolios.
Sixth, the portfolio results in the tables below critically (and conservatively) assume that an investor disregarded our March 2000 and May 2007 warnings of substantially overvalued asset classes, and recommendation to increase allocations to liquid assets and gold. Two examples give an example of the potential impact of these actions on returns (and are presented in detail in our April 2009 issue). Between 2004 and 2008, the geometric average return on the USD 4% target real return portfolio would have been higher by 2.7% if 50% of its value had been invested in a mix of 45% short term U.S. Treasuries and 5% gold by the end of June, 2007. In the case of the USD 5% target real return portfolio, the increase in geometric real return would have been 3.4%.
Seventh, the results in the tables below assume monthly rebalancing. In practice, however, our model portfolios typically do not employ this approach, and instead rebalance only when the actual weight of one or more asset classes is above or below its target weight by more than a threshold (trigger) amount. In many cases, this rebalancing strategy further increased geometric real returns.
Finally, we (like everyone else) stress that studies have repeatedly shown that historical results are no guarantee of future success. They represent one set of returns on different asset classes that were based on underlying conditions in the real economy and financial markets that may well change in the future. As we frequently note, there is an irreducible level of uncertainty associated with investing, and fallible human judgment will always be required.
|
Australian Dollars |
7% Tgt. |
6% Tgt. |
5% Tgt. |
4% Tgt. |
3% Tgt. |
2% Tgt. |
Eq. Wtd. |
|
1995 |
13.66% |
15.12% |
13.22% |
13.09% |
15.87% |
11.10% |
11.83% |
|
1996 |
8.22% |
7.96% |
7.22% |
11.49% |
9.44% |
9.11% |
5.95% |
|
1997 |
30.66% |
29.32% |
24.83% |
27.16% |
26.80% |
20.80% |
25.75% |
|
1998 |
10.91% |
9.49% |
8.51% |
8.85% |
12.36% |
8.24% |
6.57% |
|
1999 |
8.45% |
8.95% |
6.06% |
5.13% |
1.59% |
1.86% |
5.17% |
|
2000 |
4.20% |
7.47% |
9.44% |
10.95% |
10.32% |
13.41% |
10.62% |
|
2001 |
-2.44% |
-3.44% |
-1.85% |
-2.76% |
-1.14% |
0.33% |
0.32% |
|
2002 |
5.21% |
3.76% |
7.90% |
5.95% |
8.88% |
10.57% |
2.39% |
|
2003 |
-1.93% |
-2.60% |
-2.85% |
-6.75% |
-7.83% |
-6.18% |
-0.91% |
|
2004 |
6.21% |
5.82% |
6.23% |
3.05% |
4.28% |
4.03% |
9.57% |
|
2005 |
13.60% |
14.00% |
12.10% |
11.60% |
9.60% |
10.10% |
13.50% |
|
2006 |
5.10% |
2.40% |
3.30% |
1.80% |
1.70% |
-1.70% |
7.00% |
|
2007 |
2.10% |
2.50% |
0.60% |
0.70% |
0.00% |
2.70% |
-0.30% |
|
2008 |
-17.00% |
-14.10% |
-14.50% |
-11.90% |
-8.70% |
-1.90% |
-16.20% |
|
Geometric Avg. Return |
5.7% |
5.7% |
5.4% |
5.2% |
5.6% |
5.7% |
5.4% |
|
Arithmetic Avg. Return |
6.2% |
6.2% |
5.7% |
5.6% |
5.9% |
5.9% |
5.8% |
|
Standard Deviation |
10.5% |
10.1% |
9.0% |
9.6% |
9.4% |
7.3% |
9.4% |
|
Canadian Dollars |
7% Tgt. |
6% Tgt. |
5% Tgt. |
4% Tgt. |
3% Tgt. |
2% Tgt. |
Eq. Wtd. |
|
1995 |
12.54% |
12.65% |
8.72% |
8.72% |
8.64% |
2.22% |
6.97% |
|
1996 |
14.07% |
12.60% |
10.67% |
9.41% |
9.25% |
9.40% |
12.93% |
|
1997 |
11.23% |
9.31% |
7.97% |
7.30% |
7.24% |
5.00% |
7.06% |
|
1998 |
3.13% |
2.97% |
3.49% |
4.54% |
4.30% |
0.46% |
1.78% |
|
1999 |
20.30% |
15.79% |
7.21% |
4.50% |
3.18% |
2.24% |
9.42% |
|
2000 |
2.88% |
3.81% |
5.33% |
5.18% |
5.45% |
6.78% |
4.83% |
|
2001 |
-5.96% |
-4.14% |
-1.73% |
-0.62% |
0.66% |
1.27% |
-1.09% |
|
2002 |
-5.57% |
-3.06% |
0.08% |
1.31% |
2.08% |
4.07% |
-1.17% |
|
2003 |
11.46% |
9.82% |
9.63% |
7.93% |
7.46% |
9.72% |
10.19% |
|
2004 |
6.58% |
6.16% |
6.24% |
5.53% |
5.55% |
6.79% |
8.06% |
|
2005 |
13.00% |
11.10% |
10.50% |
8.90% |
8.80% |
11.20% |
10.80% |
|
2006 |
10.30% |
10.00% |
8.20% |
7.80% |
7.40% |
8.30% |
13.20% |
|
2007 |
2.90% |
0.30% |
-2.20% |
-3.60% |
-2.90% |
-2.60% |
-3.20% |
|
2008 |
-16.00% |
-13.50% |
-12.00% |
-9.50% |
-7.60% |
-11.50% |
-15.50% |
|
Geometric Avg. Return |
5.3% |
5.0% |
4.2% |
4.0% |
4.1% |
3.6% |
4.3% |
|
Arithmetic Avg. Return |
5.8% |
5.3% |
4.4% |
4.1% |
4.3% |
3.8% |
4.6% |
|
Standard Deviation |
9.7% |
8.1% |
6.4% |
5.5% |
4.9% |
5.9% |
7.8% |
|
Euro |
7% Tgt. |
6% Tgt. |
5% Tgt. |
4% Tgt. |
3% Tgt. |
2% Tgt. |
Eq. Wtd. |
|
1995 |
6.79% |
6.80% |
8.25% |
9.82% |
10.71% |
10.85% |
7.96% |
|
1996 |
20.97% |
19.74% |
13.50% |
10.22% |
8.67% |
8.58% |
13.80% |
|
1997 |
26.05% |
21.54% |
15.23% |
12.88% |
9.79% |
8.09% |
13.66% |
|
1998 |
6.66% |
5.43% |
2.34% |
3.93% |
4.72% |
5.70% |
-0.20% |
|
1999 |
39.72% |
35.47% |
27.10% |
19.95% |
14.65% |
10.79% |
26.24% |
|
2000 |
-0.86% |
-0.16% |
1.50% |
3.90% |
4.13% |
5.18% |
3.16% |
|
2001 |
-14.70% |
-11.89% |
-5.93% |
-3.12% |
-0.92% |
-0.33% |
-4.11% |
|
2002 |
-27.35% |
-21.49% |
-10.69% |
-3.75% |
0.07% |
2.86% |
-10.03% |
|
2003 |
13.35% |
14.52% |
9.44% |
5.91% |
5.01% |
5.08% |
8.29% |
|
2004 |
9.14% |
11.59% |
9.49% |
8.04% |
7.62% |
7.76% |
9.53% |
|
2005 |
23.40% |
22.00% |
18.70% |
15.40% |
12.40% |
10.70% |
18.90% |
|
2006 |
11.30% |
13.40% |
7.90% |
5.00% |
3.40% |
2.20% |
7.70% |
|
2007 |
2.50% |
-1.20% |
-3.00% |
-6.50% |
-6.50% |
-3.60% |
-3.20% |
|
2008 |
-40.30% |
-38.40% |
-25.00% |
-16.70% |
-10.10% |
-9.40% |
-25.30% |
|
Geometric Avg. Return |
3.2% |
3.6% |
4.1% |
4.2% |
4.3% |
4.4% |
3.9% |
|
Arithmetic Avg. Return |
5.5% |
5.5% |
4.9% |
4.6% |
4.5% |
4.6% |
4.7% |
|
Standard Deviation |
21.3% |
19.3% |
13.2% |
9.6% |
7.0% |
5.9% |
12.9% |
|
Indian Rupees |
7% Tgt. |
6% Tgt. |
5% Tgt. |
4% Tgt. |
3% Tgt. |
2% Tgt. |
Eq. Wtd. |
|
1995 |
5.51% |
5.17% |
6.25% |
7.90% |
7.24% |
6.11% |
10.71% |
|
1996 |
12.30% |
11.18% |
10.98% |
7.52% |
5.04% |
5.65% |
9.69% |
|
1997 |
12.20% |
12.53% |
11.26% |
10.88% |
11.89% |
10.35% |
6.42% |
|
1998 |
-7.29% |
-7.72% |
-7.69% |
-3.55% |
-2.59% |
-5.32% |
-7.34% |
|
1999 |
23.57% |
24.28% |
23.23% |
15.04% |
13.77% |
13.82% |
19.14% |
|
2000 |
6.02% |
6.68% |
7.02% |
7.05% |
5.66% |
7.81% |
6.94% |
|
2001 |
-1.28% |
-0.66% |
-1.19% |
2.73% |
5.64% |
7.39% |
-4.04% |
|
2002 |
-2.32% |
-0.28% |
-0.09% |
3.29% |
4.77% |
7.53% |
-0.76% |
|
2003 |
11.18% |
10.55% |
11.27% |
8.09% |
7.88% |
8.25% |
13.94% |
|
2004 |
2.80% |
1.25% |
2.12% |
0.14% |
-1.40% |
-1.40% |
6.24% |
|
2005 |
15.80% |
14.50% |
13.90% |
8.30% |
5.50% |
4.80% |
12.80% |
|
2006 |
11.90% |
8.40% |
8.40% |
4.50% |
1.20% |
0.20% |
10.00% |
|
2007 |
9.30% |
8.90% |
7.30% |
3.00% |
1.10% |
0.50% |
2.10% |
|
2008 |
-29.70% |
-26.60% |
-25.90% |
-15.30% |
-10.30% |
-9.60% |
-23.50% |
|
Geometric Avg. Return |
4.2% |
4.2% |
4.1% |
4.0% |
3.8% |
3.8% |
3.9% |
|
Arithmetic Avg. Return |
5.0% |
4.9% |
4.8% |
4.3% |
4.0% |
4.0% |
4.5% |
|
Standard Deviation |
12.8% |
11.9% |
11.6% |
7.3% |
6.1% |
6.4% |
10.8% |
|
Japanese Yen |
7% Tgt. |
6% Tgt. |
5% Tgt. |
4% Tgt. |
3% Tgt. |
2% Tgt. |
Eq. Wtd. |
|
1995 |
13.52% |
18.34% |
17.80% |
20.04% |
17.82% |
17.43% |
15.39% |
|
1996 |
13.23% |
21.38% |
20.13% |
18.08% |
12.69% |
10.07% |
12.94% |
|
1997 |
7.65% |
17.84% |
15.73% |
15.31% |
11.23% |
8.50% |
9.69% |
|
1998 |
-12.89% |
-7.31% |
-8.00% |
-6.93% |
-7.96% |
-7.98% |
-11.48% |
|
1999 |
19.87% |
12.34% |
15.98% |
11.08% |
10.25% |
8.18% |
11.01% |
|
2000 |
5.22% |
6.14% |
4.92% |
6.80% |
7.06% |
7.88% |
8.19% |
|
2001 |
-4.49% |
2.19% |
-0.39% |
1.32% |
0.95% |
2.16% |
1.79% |
|
2002 |
-11.14% |
-12.19% |
-12.10% |
-7.59% |
-4.25% |
-0.74% |
-5.52% |
|
2003 |
19.38% |
12.97% |
14.96% |
13.38% |
11.48% |
8.89% |
12.67% |
|
2004 |
8.76% |
5.31% |
5.77% |
6.16% |
6.14% |
4.91% |
6.83% |
|
2005 |
27.80% |
25.90% |
26.50% |
19.50% |
15.50% |
44.10% |
22.40% |
|
2006 |
16.70% |
20.00% |
17.50% |
11.20% |
9.20% |
6.70% |
13.50% |
|
2007 |
-1.40% |
2.00% |
1.80% |
4.50% |
3.10% |
2.30% |
2.30% |
|
2008 |
-60.50% |
-59.90% |
-58.70% |
-42.70% |
-33.90% |
-28.50% |
-47.20% |
|
Geometric Avg. Return |
-0.2% |
1.5% |
1.4% |
3.5% |
3.3% |
4.9% |
2.0% |
|
Arithmetic Avg. Return |
3.0% |
4.6% |
4.4% |
5.0% |
4.2% |
6.0% |
3.8% |
|
Standard Deviation |
21.8% |
21.6% |
21.3% |
16.3% |
13.1% |
15.4% |
17.1% |
|
Swiss Francs |
7% Tgt. |
6% Tgt. |
5% Tgt. |
4% Tgt. |
3% Tgt. |
2% Tgt. |
Eq. Wtd. |
|
1995 |
18.27% |
18.27% |
17.23% |
16.08% |
13.61% |
10.09% |
4.38% |
|
1996 |
20.69% |
20.69% |
22.68% |
21.86% |
16.18% |
7.98% |
24.91% |
|
1997 |
40.02% |
40.02% |
35.14% |
26.73% |
21.30% |
10.49% |
12.29% |
|
1998 |
12.60% |
12.60% |
10.03% |
9.56% |
12.17% |
7.04% |
2.25% |
|
1999 |
16.19% |
16.19% |
19.77% |
20.57% |
14.58% |
-0.09% |
28.03% |
|
2000 |
7.34% |
7.34% |
10.37% |
11.72% |
6.25% |
2.68% |
3.52% |
|
2001 |
-16.42% |
-16.42% |
-17.12% |
-15.09% |
-8.11% |
1.71% |
-6.82% |
|
2002 |
-21.48% |
-21.48% |
-18.57% |
-12.64% |
-8.27% |
3.49% |
-13.12% |
|
2003 |
16.12% |
16.12% |
15.59% |
13.86% |
9.55% |
1.14% |
11.86% |
|
2004 |
5.89% |
5.89% |
6.57% |
7.83% |
7.62% |
4.76% |
8.06% |
|
2005 |
29.80% |
29.80% |
29.40% |
25.90% |
19.70% |
7.10% |
22.20% |
|
2006 |
17.70% |
17.70% |
15.80% |
12.70% |
9.40% |
-3.20% |
10.60% |
|
2007 |
-1.90% |
-1.90% |
-1.80% |
-3.00% |
-3.60% |
-5.40% |
-0.10% |
|
2008 |
-34.90% |
-34.90% |
-35.20% |
-30.60% |
-20.40% |
1.20% |
-31.10% |
|
Geometric Avg. Return |
5.8% |
5.8% |
5.9% |
6.1% |
5.7% |
3.4% |
4.3% |
|
Arithmetic Avg. Return |
7.9% |
7.9% |
7.8% |
7.5% |
6.4% |
3.5% |
5.5% |
|
Standard Deviation |
20.4% |
20.4% |
19.7% |
16.9% |
12.1% |
4.7% |
15.6% |
|
U.K. Pounds |
7% Tgt. |
6% Tgt. |
5% Tgt. |
4% Tgt. |
3% Tgt. |
2% Tgt. |
Eq. Wtd. |
|
1995 |
11.83% |
10.84% |
11.39% |
10.79% |
9.61% |
9.31% |
10.05% |
|
1996 |
9.92% |
6.16% |
5.61% |
4.40% |
5.70% |
4.33% |
6.43% |
|
1997 |
10.56% |
2.50% |
6.59% |
2.53% |
4.65% |
7.31% |
4.21% |
|
1998 |
-2.88% |
-3.36% |
1.49% |
1.02% |
-0.14% |
5.16% |
-5.12% |
|
1999 |
16.89% |
12.34% |
11.35% |
8.47% |
8.35% |
7.79% |
13.32% |
|
2000 |
4.36% |
9.23% |
6.51% |
9.47% |
10.13% |
6.52% |
9.20% |
|
2001 |
-8.52% |
-2.80% |
-4.08% |
-2.22% |
-1.93% |
-2.34% |
-3.48% |
|
2002 |
-13.93% |
-4.49% |
-5.61% |
-0.60% |
0.54% |
1.20% |
-5.64% |
|
2003 |
18.59% |
14.56% |
11.84% |
11.07% |
11.86% |
8.96% |
15.96% |
|
2004 |
13.55% |
10.54% |
8.97% |
9.33% |
12.18% |
10.07% |
13.19% |
|
2005 |
18.40% |
16.80% |
15.30% |
13.60% |
13.40% |
11.60% |
17.30% |
|
2006 |
8.10% |
0.90% |
0.60% |
-1.90% |
2.50% |
2.10% |
6.20% |
|
2007 |
3.30% |
5.70% |
5.90% |
4.80% |
1.10% |
2.10% |
3.10% |
|
2008 |
-20.10% |
-9.70% |
-8.50% |
-5.10% |
-7.20% |
-5.40% |
-12.20% |
|
Geometric Avg. Return |
4.3% |
4.7% |
4.6% |
4.5% |
4.9% |
4.8% |
4.8% |
|
Arithmetic Avg. Return |
5.0% |
4.9% |
4.8% |
4.7% |
5.1% |
4.9% |
5.2% |
|
Standard Deviation |
12.2% |
8.0% |
7.1% |
5.9% |
6.2% |
4.9% |
9.0% |
|
U.S. Dollars |
7% Tgt. |
6% Tgt. |
5% Tgt. |
4% Tgt. |
3% Tgt. |
2% Tgt. |
Eq. Wtd. |
|
1995 |
13.16% |
14.09% |
11.94% |
11.20% |
13.95% |
8.46% |
11.46% |
|
1996 |
8.49% |
8.42% |
7.58% |
7.46% |
7.74% |
5.53% |
9.86% |
|
1997 |
10.51% |
9.47% |
6.77% |
8.74% |
9.75% |
5.77% |
2.44% |
|
1998 |
2.81% |
2.17% |
0.18% |
0.93% |
4.20% |
0.11% |
-1.49% |
|
1999 |
11.63% |
11.60% |
8.64% |
9.79% |
4.24% |
6.61% |
12.95% |
|
2000 |
-0.84% |
1.27% |
3.65% |
4.14% |
4.37% |
6.17% |
-0.40% |
|
2001 |
-3.51% |
-5.55% |
-4.02% |
-3.72% |
-2.01% |
-2.87% |
-7.14% |
|
2002 |
-3.63% |
-1.15% |
3.11% |
3.85% |
3.94% |
8.79% |
0.96% |
|
2003 |
17.68% |
17.73% |
16.54% |
16.73% |
13.50% |
13.00% |
23.87% |
|
2004 |
8.94% |
8.22% |
8.38% |
7.78% |
7.40% |
6.94% |
13.85% |
|
2005 |
5.00% |
6.10% |
5.10% |
4.20% |
3.20% |
2.30% |
6.10% |
|
2006 |
11.80% |
11.80% |
8.30% |
9.10% |
5.50% |
5.60% |
15.00% |
|
2007 |
5.70% |
7.50% |
8.50% |
7.40% |
7.40% |
7.30% |
6.40% |
|
2008 |
-37.50% |
-36.40% |
-24.00% |
-19.00% |
-15.80% |
-15.30% |
-30.20% |
|
Geometric Avg. Return |
2.6% |
3.0% |
3.9% |
4.6% |
4.6% |
3.9% |
3.7% |
|
Arithmetic Avg. Return |
3.6% |
3.9% |
4.3% |
4.9% |
4.8% |
4.2% |
4.5% |
|
Standard Deviation |
13.4% |
13.2% |
9.5% |
8.4% |
7.2% |
6.8% |
12.8% |
Are we satisfied with our model portfolios' results? If you include the impact of acting on our May 2007 (and subsequently repeated) recommendation to increase liquidity and decrease allocations to overvalued asset classes, the answer is yes. We got it right when many very smart people got it wrong, and cost people a lot of money and not a few hopes and dreams. That said, we think there is still room for improving our methodologies, based on what we have learned from the past five years' experience. So in that sense, the answer is no. On balance, our model portfolios' basic asset allocations helped avoid the worst of the downside moves, and our rebalancing strategies and the warnings based on our asset class valuation and scenario analysis methodology further reduced exposure to large downside losses. As a result, even after the crashes of 2001 and 2008, most of these model portfolios have an excellent chance of achieving their long-term targets, and thus the financial and life goals that are predicated on those returns. Given the challenges of the past few years, that is no mean feat - but we're still striving to do even better in the future.
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