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]
Small cap stocks | $2,762,600 | Long-term gov’t bonds | $276,070 |
REITs | $1,565,420 | Med-term gov’t bonds | $206,270 |
EAFE stocks | $801,460 |
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Housing Prices vs. REITs
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Commodity-Focused Funds
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
FHFA Index | REIT Index | REIT Index | |
1994 | 1.3% | 3.2% |
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Growth of $10,000
Bonds and notes represent corporate, government, and municipal debt. For example, the U.S. government issues Treasury bills, notes, and bonds; these securities are also referred to as T-bills, T-notes, and T-bonds. T-bills have an original issue maturity of 13, 26, or 52 weeks. T-notes mature in 1–10 years, and T-bonds have an original issue maturity of 10–30 years.
Fixed-income instruments are classified according to issuer, maturity, and quality. For purposes of this chapter, we will be covering the highest quality fixed-rate securities, U.S. government obligations.
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How to Evaluate Stocks; For Financial Advisors
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Housing Prices vs. REITs
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Largest Mutual Funds
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Certified Annuity Specialist
Arnott (1993) and Odelbo (1995)
Arnott (1993) reviewed characteristics of equity funds with superior returns, finding 17 actively-managed large cap funds outperforming their benchmark in 37 out of 49 rolling 5-year periods ending 1993. A paper by Odelbo (1995) found great stock fund managers did not exclusively follow one investment style while looking for undervalued stocks. The author also found there was no statistical evidence of their superior performance.
Chevalier and Ellison (1999)
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Efficient Markets
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Largest Mutual Funds
A cornerstone of indexing advocates is based on securities markets being efficient. Barron’s defines the efficient markets theory: “…market prices reflect the knowledge and expectations of all investors. Those who adhere to this theory consider it futile to seek undervalued stocks or to forecast market movements.
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Indexing
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Superior Active Fund Management
A fund’s duration can sometimes be a misleading measurement of interest rate risk if the bond fund has a meaningful weighting in convertibles, foreign stocks and bonds or derivatives. Haslem (2003) believes duration is a more accurate measurement when there are small interest rate changes. Duration tends to better reflect interest rate risk of portfolios of high quality bonds.
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Unpopular Funds
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Indexing
A number of online brokers provide free online tools for portfolio construction and management. One service known for its simplicity is Motif Investments. Motif offers nine preset and commission-free portfolios; each portfolio is comprised of the same four ETFs from Vanguard and two ETFs from BlackRock (real estate and commodities).
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Private Equity Fund Performance
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Fall of Active Fund Managers
As of June 2014, the TIPS marketplace was valued at just under $1 trillion, representing ~ 8% of the Treasury debt market. TIPS represent the only marketable U.S. debt instrument with an inflation hedge—prices are adjusted twice a year to account for CPI increases.
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Municipal Bond Pricing Website
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Dividend-Paying Stocks
Individuals own ~ 72% of all U.S. municipal debt; individual ownership exceeds any other financial asset class except for U.S. stocks (source: WSJ, June 2014). The website Electronic Municipal Market Access (EMMA), allows investors to compare trade histories of bonds with similar characteristics.
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Frontier Funds
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TIPS
