Stocks

Stanford University researchers looked at if and how the number of stocks in a portfolio reduces risk. Their research showed having a two-stock portfolio significantly reduced risk.

A mutual fund’s total costs are measured differently, depending upon the study or expert cited. For example, Kopcke reviewed the 100 largest domestic stock funds owned by defined contribution plans. Kopcke found trading costs averaged 0.11% of assets annually in the quintile with the lowest costs and 1.99% of assets in the quintile with the highest cost, with a median of 0.66%.

An interesting (and better) way to look at return and risk combined is by seeing how an asset category fared over a number of rolling periods. A rolling period includes two or more continuous years and all such periods over the time frame selected. As an example, over any given 10 years, there are eight 3-year rolling periods (1986–1988, 1987–1989, 1988–1990, 1989–1991, etc.). The advantage of using rolling periods is bad returns cannot be hidden as easily. Rolling periods provide an “apples to apples” form of comparison.

The table below shows growth of a $10,000 investment in each of several categories. Notice the disparity between equities and fixed income.

Growth of $10,000  [1972–2016]

FHFA is the federal agency regulating Fannie Mae, Freddie Mac, and 12 Federal Home Loan Banks. The index below represents home sales throughout the U.S. NAREIT is a real estate investment trust trade group. The index is comprised of all publicly traded equity REITs in the U.S.

Home Prices vs. REITs

As advisors, we sometimes forget the basics: a stock represents a fractional ownership interest in a publicly traded corporation. Historically, returns have been higher for owners and partial owners (stocks) than someone who lent money (notes and bonds). Stocks can be characterized by size (capitalization): small cap, medium cap, and large cap. A publicly traded company’s capitalization is calculated by multiplying the price per share by the number of outstanding shares of stock.