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When designing an investment portfolio, your design must attempt to balance the rate of return generated with the volatility and risk that accompanies the selected asset allocation and individual investments. Surprisingly, an investor does not need to invest the majority of their accumulated savings in Growth assets to achieve a reasonable rate of return with an acceptable level of risk.

For example, Fixed Income investments typically

  • have a guarantee and maturity date supported by the investment’s issuer, which provides the investor some assurance their invested capital will be returned.
  • tend to have less volatile market prices, thereby decreasing the fluctuations in the investment’s pricing and valuation.
  • are influenced by the issuer’s credit rating and the current and future direction of interest rates.
  • pay regular interest income, which attracts a higher level of taxation.

In contrast, Growth investments typically

  • have no guarantee or maturity date for the return of the investor’s invested capital.
  • have pricing that can be volatile causing the value of your accumulated savings to fluctuate day-to-day, week-to-week, month to-month and year-to-year.
  • can be influenced by the issuer’s profit, dividend, business history, the current economic and stock market cycle, and the popularity of the issuer’s industry with investors.
  • can pay regular dividend income, generate capital gains and losses, which all attract lower levels of taxation.

Remember: Finding the correct balance between your required rate of return with the fluctuations in the value of your accumulated savings should be the goal of portfolio design.

Russell Investments on single asset vs. multiple asset 

Russell Investments is a subsidiary firm of Northwestern Mutual and is headquartered in Seattle, Washington, U.S.A. It provides investment products and services to individuals and institutions in 47 countries. Founded in 1936, Russell Investments focuses on a multi-manager investor approach and is the creator of Russell Indices.

For years, Russell Investments has tracked and published the annual performance numbers for single asset categories and multi-asset portfolios. In Canada, they updated and published the data each year until 2006. They continue to update and provide the data on their U.S. website for American Investors. The following provides a link to their U.S. website that displays the 2011 performance data: Single vs Multi-Asset Portfolios and the most recent 2014 performance data: Single vs Multi-Asset Portfolios.

Below, we have summarized historical data collected from the websites of Russell Investments in Canada and the United States to look at the historical results for investment portfolio’s that were invested in a single asset category versus a portfolio invested in multiple asset categories.

Note: Before reviewing the data contained in the tables, it is worth pointing out that Russell Investments provide two sets of numbers:

  • Annualized Return (the historical average annual rate of return generated during the measurement period for the specific asset category or multi-asset portfolio)
  • Annualized Standard Deviation (a standardized measure of the price volatility for the single asset category or multi-asset portfolio. A higher percentage reflects a higher volatility in the market price for underlying asset. From an investor’s perspective a smaller Standard Deviation number indicates an investment with a lower price fluctuation and/or a lower investment risk level.)

Remember: Designing a portfolio with a high Annualized Return and a low Standard Deviation should be your goal.  As Russell Investments explain, it is important to understand Standard Deviation as they say here:

When you think of the weather in San Francisco and Kansas City, do you think it’s the same? While the two cities have a similar average annual temperature of 57 and 54 degrees respectively, they experience dramatically different ranges of temperature. This spread in temperature is the standard deviation. Generally, the weather in San Francisco varies 5 degrees from the average (52 to 62). However, there is greater fluctuation in temperature for Kansas City, where the temperature can vary as much as 18 degrees from the average (36 to 72).

Now, consider what this means if applied to your investment portfolio? Although two portfolios can have similar annualized returns, the ride along the way can be significantly different. One portfolio may have a higher standard deviation, reflecting more ups and downs while the other portfolio could have a lower standard deviation, indicating a smoother ride.”

Below, we have summarized historical data collected from the websites of Russell Investments in Canada and the United States.

Note: The tables summarize historical results and obviously they do not forecast future outcomes, but the numbers are useful for guidance just the same. Each set of data is for a time horizon of 30 years plus, and each set of data includes both good economic and investing cycles and bad economic and investing cycles.

 

Canadian Investors:

Individual Asset Classes:

 

Canadian

Stocks

Canadian

Bonds

U.S.

Stocks

Overseas

Stocks

1970 - 2001

 

 

 

 

Annualized Return (%)

10.0%

10.2%

13.5%

12.3%

Annualized Standard Deviation(%)

16.2%

7.8%

16.6%

22.2%

 

 

 

 

 

1975 - 2004

 

 

 

 

Annualized Return (%):

11.8%

10.4%

14.4%

13.3%

Annualized Standard Deviation(%)

15.4%

7.6%

16.0%

21.3%

 

 

 

 

 

1976 - 2006

 

 

 

 

Annualized Return (%):

12.1%

10.2%

13.3%

13.0%

Annualized Standard Deviation(%)

16.0%

6.6%

14.2%

15.6%

 

 

 

 

 

 

 

Canadian Investors:

Asset Allocation Strategies:

 

100%

Stocks

80% Stocks

 20% Bonds

60% Stocks

40% Bonds

35% Stocks

65% Bonds

1970 - 2001

 

 

 

 

Annualized Return (%)

12.2%

11.4%

11.5%

11.1%

Annualized Standard Deviation (%)

15.3%

12.5%

10.3%

8.3%

 

 

 

 

 

1975 - 2004

 

 

 

 

Annualized Return (%):

13.5%

12.6%

12.4%

11.7%

Annualized Standard Deviation (%)

14.1%

11.4%

9.3%

7.5%

 

 

 

 

 

1976 - 2006

 

 

 

 

Annualized Return (%):

13.2%

12.5%

12.1%

11.4%

Annualized Standard Deviation (%)

12.9%

11.4%

9.0%

7.0%

     

 

Note: The American site uses a slightly different approach to the asset allocation, namely it is constructed for U.S. investors and the Asset Allocation Strategy percentages are slightly different. The U.S. results support the view that investing your savings in multiple asset categories will substantially reduce the portfolio’s volatility or risk level with only a small reduction in the average annual rate of return.

Below are tables that summarize some of their U.S. data

U.S. Investors:

Individual Asset Classes:

 

Large Capital Stocks

Small Capital Stocks

 

Bonds

 

Real Estate

International 

Stocks

1974 - 2008

 

 

 

 

 

Annualized Return (%)

10.02%

12.65%

8.26%

12.18%

9.79%

Annualized Standard Deviation(%)

18.35%

21.75%

7.21%

18.77%

22.82%

 

 

 

 

 

 

1975 - 2009

 

 

 

 

 

Annualized Return (%):

11.74%

14.15%

8.53%

13.75%

11.47%

Annualized Standard Deviation(%)

17.29%

21.00%

6.95%

17.90%

22.27%

 

 

 

 

 

 

1976 - 2010

 

 

 

 

 

Annualized Return (%):

11.18%

13.54%

8.32%

13.98%

10.72%

Annualized Standard Deviation(%)

16.80%

20.14%

6.90%

18.01%

21.93%

      
1976 - 2014     
Annualized Return (%):11.66%13.43%7.86%13.37%10.01%
Annualized Standard Deviation(%)15.18%20.30%5.46%15.62%17.08%

 

 

 

 

 

 

 

 

U.S. Investors:

 Asset Allocation Strategies:

 

 

 100% Stocks

 

80% Stocks 20% Bonds

 

60% Stocks 40% Bonds

 

40% Stocks 60% Bonds

 

20% Stocks

80% Bonds

1974 - 2008

 

 

 

 

 

Annualized Return (%)

10.70%

10.62%

10.12%

9.66%

8.95%

Annualized Standard Deviation (%)

17.57%

14.86%

11.53%

9.36%

7.49%

 

 

 

 

 

 

1975 - 2009

 

 

 

 

 

Annualized Return (%)

12.38%

12.04%

11.20%

10.49%

9.46%

Annualized Standard Deviation (%)

16.59%

13.95%

10.69%

8.62%

6.98%

 

 

 

 

 

 

1976 - 2010

 

 

 

 

 

Annualized Return (%)

11.80%

11.52%

10.78%

10.13%

9.18%

Annualized Standard Deviation (%)

16.07%

13.49%

10.34%

8.34%

6.82%

      
1977 - 2011     
Annualized Return (%)11.08%10.86%10.27%9.71%8.87%
Annualized Standard Deviation (%)16.15%13.54%10.34%8.29%6.71%

 

 

 

 

 

 

Check out Step 8: Determine your Diversification Guidelines.

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