Analyze Charts Graphs

Ten-Year Risk and Return of Equity Asset Classes by Index

Analyze Charts Graphs

Most of the experts will tell you that a diversified equity portfolio is comprised of funds from the various asset classes, which are separated in terms of size and style. The idea is to build a broad base of funds that will hold up over the long haul and endure the market's fickle tastes as styles fall in and out of favor. Sounds simple enough, but as we know this is easier said than done.

Using Morningstar's classification system, the fund universe is broken down into 9 different asset classes, or "style boxes" to use the Morningstar parlance. Now, there are no hard and fast rules about how much should be allocated to each asset class - that depends on each investor's unique profile. Also, some investors like to keep it simple and hold fewer funds, whereas asset allocation junkies prefer a bigger lineup of funds to cover each class individually. There are advantages and disadvantages that go along with each strategy in terms of taxes and flexibility, for instance.

The process of picking funds is somewhat easier for indexers because they're not looking for the best manager. Instead, they pick up the index fund or ETF that covers the asset class and move on. However, there are several well-known indexes that cover each asset class, so there is some judgment involved.

Although there is considerable debate on this point on our discussion boards, many investors believe it is reasonable to look at past index returns and volatility as a guide for making asset allocation decisions. So let's do that.

Morningstar keeps track of 10-year annualized returns and standard deviation, and we added 15-year annualized returns for further reference. Standard deviation tells an investor how widely the index returns fluctuated over the 10-year period. A higher standard deviation implies more volatility and risk.

Large Cap Indexes
Index
Std. dev. - 10 yrs.
10 yr. ret.
15 yr. ret.
Barra Large Cap Growth
18.19
12.70%
13.09%
Barra Large Cap Value
15.50
12.79%
11.82%
Dow Jones Large Growth
22.32
10.18%
11.20%
Dow Jones Large Value
14.12
13.01%
12.35%
Nasdaq Composite
31.46
12.05%
-
Russell 1000
15.96
12.85%
12.53%
Russell 1000 Growth
20.46
10.87%
11.86%
Russell 1000 Value
14.63
14.05%
12.6%
Standard & Poor's 500
15.80
12.97%
12.67%
Wilshire Large Cap 750
16.18
12.48%
12.34%
Wilshire Large Growth
20.06
10.74%
11.65%
Wilshire Large Value
15.17
12.98%
12.14%

*Source: Morningstar data as of 1/31/2001[/:Author:]

Mid Cap Indexes
Index
Std. dev. - 10 yrs.
10 yr. ret.
15 yr. ret.
Barra MidCap Growth
24.30
14.32%
-
Barra MidCap Value
16.47
14.88%
-
Dow Jones Midcap Growth
28.30
11.05%
10.78%
Dow Jones Midcap Value
14.98
13.03%
12.86%
Russell Midcap Growth
26.05
10.64%
11.59%
Russell Midcap Value
14.62
14.24%
12.76%
Standard & Poor's Midcap 400
18.75
14.74%
15.01%
Wilshire 4500
21.77
10.06%
10.27%
Wilshire Mid Cap 500
18.95
13.52%
12.80%
Wilshire Midcap Growth
26.35
10.63%
11.27%
Wilshire Midcap Value
15.61
14.61%
13.12%

*Source: Morningstar data as of 1/31/2002[/:Author:]

Small Cap Indexes
Index
Std. dev. - 10 yrs.
10 yr. ret.
15 yr. ret.
Dow Jones Small Growth
30.62
10.85%
10.90%
Dow Jones Small Value
14.70
13.75%
13.20%
Russell 2000
20.14
10.53%
9.87%
Russell 2000 Growth
26.95
5.99%
7.02%
Russell 2000 Value
14.79
14.34%
12.19%
Standard & Poor's Smallcap 600
19.88
12.87%
10.29%
Wilshire Small Cap 1750
20.25
11.81%
10.86%
Wilshire Small Growth
27.47
7.25%
8.12%
Wilshire Small Value
15.91
14.36%
12.19%

*Source: Morningstar data as of 1/31/2002

Finally, here's similar data for two broad total market indexes, as well some numbers for a REIT index and an international index - the broad MSCI EAFE.

Index
Std. dev. - 10 yrs.
10 yr. ret.
15 yr. ret.
Russell 3000
15.85
12.58%
12.27%
Wilshire 5000
16.14
12.16%
12.00%
Wilshire REIT
14.01
11.01%
7.76%
MSCI EAFE
15.13
4.76%
3.55%

*Source: Morningstar data as of 1/31/2002

So there's some index data to chew on when you're making your asset allocation calls, although there are a few caveats. The first is that these numbers are based on past returns, and as such they're no guarantee of future results, as they say. However, most investors use past performance as a guide to form reasonable expectations when making portfolio allocation decisions - the alternative is to make like the ostrich. But it should be duly noted that the 1990s showed us one of the most exuberant bull markets in U.S. history.