9.4.1 Long-term History
Characterizes Risk and Return
The history of several U.S.
stock markets are captured in Figure 9-2. In essence
this chart captures the effectiveness of capitalism over the last 80
years. The numbered events in Figure 9-2 are taken
from the historical events in Table 9-2 below it, titled
“Market Turmoil and the Dow Jones Industrial Average.” Despite
several set backs, capitalism continues to work. Also note that the
value of a dollar scale is a log scale, so each unit increases by a
factor of 10. These are indexes and therefore the growth of a dollar
does not reflect any fees or transaction costs. This long-term history
of quality data allows investors to create the best set of probabilistic
estimates of future performances of these indexes.
Figure
9-2
|
Table
9-2
|
IFA Index Portfolios
have also shown tremendous long-term despite the impact of short-term
bear markets. Click here to view a pdf of the growth of a dollar
invested for the last 69 years in Index Portfolios 5, 50 and 100
as well as for the S&P 500.
(click
here to view the pdf)
The global history of the
size and value effect on stocks is made even more clear by reviewing
Figure 9-3. Next, Table 9-4 provides
a thorough analysis of many indexes over the 1927 to 2006 period. Both
the chart and table indicate that over the 80-year period, small-value
has outperformed the S&P 500 and large-cap growth. Also, it is
clear that value has higher returns in international and emerging markets,
even though available data only dates back to 1982 for international
and 1989 for emerging markets.
Figure
9-3
|
Figure
9-4
|
Table
9-3
 |
To expand the range of asset
classes to include art, farmland and gold, let’s take a look at
Table 9-3.
It is interesting that over
the 48-year period emerging market public equities outperformed venture
capital, and at a lower risk level. In addition, the S&P 500 outperformed
real estate by more than 50%, although the S&P 500 had about three
times the risk. Figure 9-4 graphs the data from Table
9-3 on the Markowitz risk/return plot and adds in index portfolios
5, 50 and 100 for comparison. Note where venture capital and emerging
markets sit on the plot. Gold and silver are also interesting, reinforcing
the idea that they have lots of risk and returns pretty close to T-bills
and bonds.
Table
9-4
|
Table
9-5
|
Venture Economics, an information
provider for equity professionals, compiled a 20-year data series of
various types of private equity strategies for the period ending September
30, 2001. According to the survey, venture and private equity strategies
generally performed well over the period. But, the premium relative
to public securities appears rather small considering the higher risk,
investment concentration, absence of liquidity, transparency and daily
pricing. The results are shown in Table 9-5.
9.4.2 Cross Correlation
among Indexes
