A couple of times per year I publish this benchmark return report for investment portfolios. This is useful for those who use a buy and hold approach to holding their investments, in various common investment allocations of stocks and bonds. I provide this so that you can compare your investment returns to what the market was doing.
For this report I compare 5 models to help demonstrate different risk levels: very conservative ‘Volvo portfolio’, conservative ‘Lexus portfolio’, moderate ‘Acura portfolio’, aggressive ‘BMW portfolio’, and lastly the very aggressive ‘Porsche model portfolio’ – each investing in a different mixture of cash, bonds and stock, as well as different allocations of large, mid and small cap stock and foreign stocks.
The table below compares the GROSS rates of return that you would have earned in any of these portfolios if you invested in index funds that held investments identical to the index. Gross rates of return are before any expenses, such as: * Mutual fund management fees and expenses * Taxes * Commissions * Transaction costs * Financial planner’s management fee.
|Historical Rates of Return as of 12/31/2012|
|Model Type||Very Conservative||Conservative||Moderate||Aggressive||Very Aggressive|
If you do your own investing, active or passive, or hire someone to invest for you, it is prudent to make sure that you are doing as good as the benchmark net of expenses. The benchmark is a minimum expectation of rate-of-return that you should be achieving. It is a way to hold yourself or your investment adviser accountable. It is important that you know why your investments are either not doing as well or are doing much better than the benchmark. Either could be cause for concern: it could be merely a timing issue or it could be because your adviser made a mistake or is not doing his/her job. It is important that you are in the know, asking the right questions, and getting the right answers.
What is asset allocation? You may want to read my article entitled The Asset Allocation Style of Investing, which highlighted this method of investing made popular from the study by Garry P. Brinson, Brian D. Singer, and Gilbert L. Beebower; they found that over 91% of long-term portfolio performance is derived from the decisions made regarding asset allocation, and not from market timing or security selection.
Asset allocation investors do not just invest in funds similar to the S&P 500 or the Dow (the most common benchmarks), therefore they should compare their results to aggregated benchmarks that include indices that closely match their allocations.
Timing: In order to have earned these rates of return, you would have had to invest at the same precise time of the time period represented. Fluctuations in the market can make a drastic difference in your actual rate of return, so if you invested a lump sum of money on a day that the market was down or up, or you invested each month (perhaps using dollar-cost-averaging), you may and will experience quite a bit different results from those illustrated here.
Historical Perspective of Indexing: Index fund investing (passive) has been popular because people hear in the media frequently that a majority of actively managed mutual funds do not consistently beat their respective index.
Actively managed mutual funds usually have higher expenses, thus making it more challenging for them to out-perform their passive brethren. However, investors may want to consider looking for mutual funds that beat the indexes (net of expenses); they might even find some that have a lower risk (volatility) than the index.
The preference to invest in index funds is a fairly recent phenomenon. Now you can even invest in ETFs (exchange traded funds), a hybrid of index investing that has emerged in the last several years. The charts below illustrate returns all the way back to 30 years; however, index funds and ETF’s didn’t exist back that far for each of the indexes used to make these calculations.
The indexes used to compile the historical rates of return are below. Keep in mind there are dozens of different indices. Many feel that the ones used here most closely represent the benchmark for each category. There is some differing of opinion in the investment community as to the best indices that should be used for benchmarking. * Cash – Money Market (3-month CD * Intermediate Long Bond – Lehman Bros Aggregate Bond * Large Cap Value — S&P 500 * Mid Cap — Russell Mid-Cap Index * Small Cap – Russell 2000 * International Equity – MSCI EAFE Equity Index.
Past Performance an Indication of Future Performance? Anyone who as ever glanced at any financial product advertising or literature will see “Past results are not an indication of future performance” pasted all over the place. This sentence is required by the security industry’s regulating authorities and it is very true. However, in order to make intelligent decisions, historical information is very useful for comparison purposes, in addition to a lot of other financial information, including your own personal financial plan.