Ibbotson SBBI 2013 Classic Yearbook. Market Results for Stocks, Bonds, Bills, and Inflation

Transcription

1 Ibbotson SBBI 2013 Classic Yearbook Market Results for Stocks, Bonds, Bills, and Inflation

2 2013 Ibbotson Stocks, Bonds, Bills, and Inflation (SBBI ) Classic Yearbook Stocks, Bonds, Bills, and Inflation and SBBI are registered trademarks of Morningstar, Inc. Ibbotson and Ibbotson Associates are registered trademarks of Ibbotson Associates, a wholly owned subsidiary of Morningstar, Inc., and are used with permission. The information presented in this publication has been obtained with the greatest of care from sources believed to be reliable, but is not guaranteed to be complete, accurate or timely. Morningstar and its affiliated companies expressly disclaim any liability, including incidental or consequential damages, arising from the use of this publication or any errors or omissions that may be contained in it Morningstar. All rights reserved. No part of this publication may be reproduced or used in any other form or by any other means graphic, electronic, or mechanical, including photocopying, recording, taping, or infor mation storage and retrieval systems without Morningstar s prior, written permission. To obtain permission, please call Product Sales or write to the address below. Your request should specify the data or other information you wish to use and the manner in which you wish to use it. In addition, you will need to include copies of any charts, tables, and/or figures that you have created based on that information. There is a minimum $1500 processing fee per request. There may be additional fees depending on your proposed usage. Published by: Morningstar, Inc. 22 W. Washington Street Chicago, Illinois Main (312) Product Sales (888) Fax (312) global.morningstar.com/datapublications ISBN ISSN The data in the 2013 Ibbotson SBBI Classic Yearbook is also available within many of Morningstar s software products. Statistics and graphs can be quickly accessed over any subperiod. For more information about Morningstar s software and data products for individuals, advisors, and institutions, see Investment Tools and Resources at the back of this book, or call (800) Ibbotson Associates is a leading authority on asset allocation with expertise in capital market expectations and portfolio implementation. Approaching portfolio construction from the top-down through a research-based investment process, its experienced consultants and portfolio managers serve mutual fund firms, banks, broker-dealers, and insurance companies worldwide. Ibbotson Associates methodologies and services address all investment phases, from accumulation to retirement and the transition between the two. Visit Ibbotson.com for contact information, published research, product fact sheets and other information. Additional copies of the 2013 Ibbotson SBBI Classic Yearbook may be obtained for $185 per book, plus shipping and handling. Archived editions (2012 and prior) are available in limited quantities for $200 per book, plus shipping and handling. For purchasing or other information related to volume discounts or companion publications, please call (888) , or write to the address above.

3 Table of Contents Acknowledgements Introduction 1 vi References 6 Chapter 1 Highlights of the 2012 Markets and the Past Decade 13 Events of Economic Overview 13 Domestic and International Governmental Change 15 Selected Domestic and International Highlights 17 Natural and Environmental Disasters Currency Matrix Commodity Price Changes 22 Global Currencies 23 Commodities 23 Sector Highlights 23 Results of 2012 Capital Markets 28 A Graphic View of the Decade 30 The Decade in Perspective 30 Table of Market Results for Morningstar Style Indexes 32 Chapter 2 The Long Run Perspective 33 Motivation 33 Historical Returns on Stocks, Bonds, Bills, and Inflation 33 Logarithmic Scale on the Index Graphs 34 Large Company Stocks 34 Small Company Stocks 34 Long-Term Corporate Bonds 34 Long-Term Government Bonds 35 Intermediate-Term Government Bonds 35 Treasury Bills 35 Inflation 35 Summary Statistics of Total Returns 35 Capital Appreciation, Income, and Reinvestment Returns 36 Annual Total Returns 39 Rolling Period Returns 39 Real Estate Investment Trusts 47 Equity REIT Index Construction Methodology 49 Diversification 50 Summary Statistics for Equity REITs and Basic Series Ibbotson SBBI Classic Yearbook Morningstar i

4 Chapter 2 The Long Run Perspective (Continued) Commodities Overview 51 Commodities as a Hedge Against Inflation 52 Chapter 3 Description of the Basic Series 53 Large Company Stocks 53 Small Company Stocks 53 Long-Term Corporate Bonds 54 Long-Term Government Bonds 55 Intermediate-Term Government Bonds 56 U.S. Treasury Bills 57 Inflation 59 Positive Capital Appreciation on Intermediate-Term Government Bonds 59 Chapter 4 Description of the Derived Series 63 Geometric Differences Used to Calculate Derived Series 63 Definitions of the Derived Series 63 Equity Risk Premium 64 Small Stock Premium 64 Bond Default Premium 64 Bond Horizon Premium 64 Inflation-Adjusted Large Company Stock Returns 65 Inflation-Adjusted Small Company Stock Returns 66 Inflation-Adjusted Long-Term Corporate Bond Returns 66 Inflation-Adjusted Long-Term Government Bond Returns 67 Inflation-Adjusted Intermediate-Term Government Bond Returns 67 Inflation-Adjusted U.S. Treasury Bill Returns (Real Riskless Rates of Return) 67 Chapter 5 Annual Returns and Indices 71 Annual and Monthly Returns 71 Calculation of Returns From Index Values 72 Calculation of Annual Income Returns 72 Index Values 72 Using Index Values for Performance Measurement 73 Computing Returns for Non-Calendar Periods 73 Chapter 6 Statistical Analysis of Returns 79 Calculating Arithmetic Mean Returns 79 Calculating Geometric Mean Returns 79 Geometric Mean Versus Arithmetic Mean 79 ii Table of Contents

5 Chapter 6 Statistical Analysis of Returns (Continued) Calculating Standard Deviation 80 Limitations of Standard Deviation 81 Semi-Variance and Semi-Standard Deviation 81 Issues Regarding Semi-Variance 81 Volatility of the Markets 82 Changes in the Risk of Assets Over Time 82 Correlation Coefficients: Serial and Cross-Correlations 86 Serial Correlation in the Derived Series: Trends or Random Behavior? 87 Summary Statistics for Basic and Inflation-Adjusted Series 87 Rolling Period Standard Deviations 88 Rolling Period Correlations 89 True Impact of Asset Allocation on Returns 89 Chapter 7 Firm Size and Return 95 The Firm Size Phenomenon 95 Construction of the Decile Portfolios 95 Aspects of the Firm Size Effect 95 Presentation of the Decile Data 96 Size of the Deciles 103 Long-Term Returns in Excess of Risk 103 Serial Correlation in Small Company Stock Returns 105 Seasonality 106 Chapter 8 Growth and Value Investing 107 Discussion of Style Investing 107 Different Ways of Measuring Growth and Value 107 Morningstar Growth and Value Series 107 The Morningstar Style Box 108 The Morningstar Market Barometer 108 Fama-French (FF) Growth and Value Series 109 Historical Returns of FF Growth and Value Series 111 Summary Statistics of FF Growth and Value Series 111 Presentation of Annual FF Growth and Value Returns 112 Conclusion Ibbotson SBBI Classic Yearbook Morningstar iii

6 Chapter 9 Liquidity Investing 115 What is Liquidity? 115 Valuation as Present Value of Cash Flows 115 The Liquidity Premium 115 Liquidity and Stock Returns 116 Liquidity as an Investment Style 117 The Liquidity Style of Mutual Funds 119 International Liquidity Premiums 119 Conclusion 119 Chapter 10 Alternative Investments 121 The Birth of Liquid Alternatives 121 Alternative Investments, Deconstructed 122 Historical Returns and Risk Exposures of Alternative Strategies 123 Morningstar Risk-Adjusted Returns 124 Incorporating Alternative Investments in a Portfolio 127 Chapter 11 Using Historical Data in Forecasting and Optimization 131 Probabilistic Forecasts 131 Mean-Variance Optimization 132 Estimating the Means, Standard Deviations, and Correlations of Asset Returns 133 Generating Probabilistic Forecasts 134 Constructing Efficient Portfolios 136 Using Inputs to Form Other Portfolios 136 Enhancements to Mean-Variance Optimization 137 Markowitz Markowitz Approaches to Calculating the Equity Risk Premium 143 Supply Model 143 Long-Term Market Predictions 145 Chapter 12 Wealth Forecasting With Monte Carlo Simulation 147 Meeting Today s Challenges 147 What Is Monte Carlo Simulation? 147 Why Use Monte Carlo Simulation? 147 Types of Monte Carlo Simulation 147 Wealth Forecasting 148 Steps in Monte Carlo Simulation 149 Case Study: Establishing Returns and Wealth Values 149 iv Table of Contents

7 Chapter 12 Wealth Forecasting With Monte Carlo Simulation (Continued) Case Study: Asset Class Forecasts 150 Case Study: Stock and Bond Portfolio Forecasts 151 Case Study: Ibbotson s National Savings Rates Guidelines for Individuals 152 Limitations of Monte Carlo Simulation 153 Conclusion 154 Chapter 13 Stock Market Returns from 1815 to Introduction 155 Data Sources and Collection Methods of the 155 Ibbotson/Goetzmann/Peng Annual Data Series Price Index Estimation 156 A Look at the Historical Results 156 One and a Quarter Centuries of Stock Market Drawdowns 158 Conclusion 161 The Origin of Market Bubbles 161 Chapter 14 International Equity Investing 165 Discussion of International Investing 165 Construction of the International Indices 165 Benefits of Investing Internationally 165 Risk Associated With International Investing 168 Summary Statistics for International and Domestic Series 170 Conclusion 171 Chapter 15 Lifecycle Investing 173 What is Lifecycle Investing? 173 Challenges Present in Lifecycle Investing 173 Evaluating Lifecycle Investing Methodologies 173 Ibbotson s Lifestyle Asset Allocation Methodologies 175 Appendices Appendix A: Monthly Returns on Basic Series (Jan to Dec. 2012) 181 Appendix B: Cumulative Wealth Indices of Basic Series (Dec to Dec. 2012) 217 Appendix C: Rates of Return for all Yearly Holding Periods ( ) 241 Glossary 287 Index 297 Investment Tools and Resources Ibbotson SBBI Classic Yearbook Morningstar v

8 Acknowledgements We thank, foremost, Roger G. Ibbotson, Chairman and CIO of Zebra Capital Management, Professor in Practice at the Yale School of Management, and founder and former Chairman of Ibbotson Associates, for his contributions to this book. Professor Ibbotson and Rex A. Sinquefield, a director of Dimensional Fund Advisors (Santa Monica, CA), wrote the two journal articles and four books upon which the Ibbotson Stocks, Bonds, Bills, and Inflation Classic Yearbook is based and formulated much of the philosophy and methodology. Dimensional Fund Advisors also provides the small stock returns, as it has since We thank others who contributed to this book. Rolf W. Banz provided the small stock returns for Thomas S. Coleman (Greenwich, CT), Professor Lawrence Fisher of Rutgers University, and Roger Ibbotson constructed the model used to generate the intermediate-term government bond series for The pioneering work of Professors Fisher and James H. Lorie of the University of Chicago inspired the original monograph. We also wish to acknowledge the valuable role of Dr. Stan V. Smith, President of Smith Economics Group, Ltd. and former managing director of Ibbotson Associates, who originated the idea of the Yearbook. The Center for Research in Security Prices (CRSP ) at the University of Chicago contributed the data and methodology for the returns on the NYSE by capitalization decile used in Chapter 7, Firm Size and Return. Ken French, of Dartmouth College, and Eugene Fama, of the University of Chicago Booth School of Business, contributed the data and methodology for the returns on the growth and value portfolios. Chapter 9, Liquidity Investing, was written by Roger Ibbotson, Professor in Practice at Yale School of Management. Daniel Y.-J. Kim, Research Director of Zebra Capital Management, and Michael Holmgren, of Integrated Time Series Analytics, helped develop the empirical results. William N. Goetzmann, Roger Ibbotson, and Liang Peng, all at the Yale School of Management, assembled the New York Stock Exchange database for the period prior to 1926, while James Licato converted the research into Chapter 12, Stock Market Returns from James Licato also converted work originally authored by Peng Chen, president of Morningstar s global investment management division, into Chapter 11, Wealth Forecasting with Monte Carlo Simulation, created Chapter 13, International Equity Investing, and contributed to other chapters. Rod Bare contributed Chapter 14, Lifecycle Investing. Paul Kaplan PhD, while at Ibbotson Associates, was the main contributor to Chapter 10, Using Historical Data in Forecasting and Optimization, and more recently, created a set of monthly real stock market total returns going back a full 125 years in Chapter 12. Also, in Chapter 10, Paul Kaplan and Sam Savage, Consulting Professor of Management Science & Engineering at Stanford University, present new research and methodology that they have aptly dubbed Markowitz 2.0 which promises to take traditional portfolio optimization into the supersonic age. Paul, now director of European quantitative research at Morningstar, Peng Chen, and Thomas Idzorek, chief investment officer and director of research at Morningstar Investment Management, all continue to provide valuable insights and analysis for the SBBI yearbook series. We want to thank Laurence B. Siegel, research director of the Research Foundation of CFA Institute and senior advisor to Ounavarra Capital LLC, New York; from 1994 to 2009 he was director of research at the Ford Foundation and prior to that at Ibbotson Associates, James Harrington, formerly the senior editor of the SBBI Yearbooks at Morningstar, and Michael Barad, formerly the head of financial communications at Ibbotson Associates and Morningstar, for their many contributions to the Yearbook. Senior Editor Magdalena Mroczek Contributing Editors Kevin Piccolo Hui Min Chang Shane Smith Director of Design David Williams Design Manager Christopher Cantore Production Designer Chad Spaulding Chairman and CEO Joe Mansueto President, Research Division Don Phillips Director of Finance, Research Division Matthew D. Biecker vi