Stocks

One way academic researchers measure investment risk is by looking at stock price volatility. Two risks associated with stocks are systematic risk and unsystematic risk. Systematic risk, also known as market risk, cannot be reduced by diversification within the stock market. Sources of systematic risk include: inflation, interest rates, war, recessions, currency changes, market crashes and downturns plus recessions. Because the stock market is unpredictable, systematic risk always exists.

From the beginning of 1980 through August 24, 2015, there have been just 29 instances (29/1851 weeks = 1.5% of the weeks) when the S&P 500 dropped 5% or more in a calendar week.

S&P 500 Weekly Drops of 5%+  [1980-2001]

From March 2009 to March 2014, stocks returned 26% a year, as measured by the Wilshire 5000. Based on tracking by the Hulbert Financial Digest, the 5 best advisors (out of 200) over the five years lost an average of 58% during the 2007-2009 downturn. Picking an investment advisor based on their bear market returns is also usually a bad idea; the top-ranked bear market stock pickers rarely make good calls when markets rise.

The table below lists the five largest Dow bull markets as of August 14, 2014 (source: WSJ).

Longest Dow Jones Industrial Average Bull Markets

The table below shows annualized returns for the period 1974-2013 for different categories of U.S. stocks (source: CRSP, University of Chicago, 2014). The table includes all publicly traded companies in the U.S. with at least a $1 billion market capitalization.

Annualized Returns: 1974-2013

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.

There is no standard definition of a small cap stock. The methodology used deciding what stocks are included in a small cap index can result in significant return differences. As of the middle of 2014, The S&P SmallCap outperformed the Russell 2000 for 12 of the last 19 years. The Russell 2000 has been tracking small caps for 30+ years; the S&P SmallCap 600 has been around for 19+ years.

S&P SmallCap 600 vs. Russell 2000

As of May 2014, 421 (or 84%) of the S&P 500 companies paid dividends. Excluding the 2007-2009 financial crisis, the number of companies in the S&P index paying dividends has been increasing for the past 10 years. The 20-year low for the S&P 500 dividend yield was 1.09%, reached in 2000 after the Internet bubble. The 20-year high of 4.25% was reached in 2009 as the financial crisis ended.

According to research by Prof. Dichev, from 1926 to 2002, stock investors lagged the stock market by an average of 1.3 percentage points a year, largely due to buying during “hot markets” and selling when stocks performed poorly.