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The Randomness of Returns (3 slides)
This example features annual performance of major asset classes in the Canadian, US, international, and emerging markets between 1993 and 2007.
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Equity Returns of Developed Markets (2 slides)
While stock markets around the world often outperform the Canadian market, this performance is unpredictable and at times extreme.
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The Importance of Diversification
Many Canadians concentrate most of their investment holdings in their home stock market. They choose Canadian stocks and mutual funds—or use several brokers who focus on Canadian equity investing. Yet, many of these investors may not consider their portfolios to be undiversified. From a global perspective, limiting one’s investment universe to a single stock market is a concentrated strategy with possible risk and return implications.
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World Market Capitalization
Viewing the world map by relative market capitalization illustrates the importance of building a globally diversified portfolio and avoiding a home market bias.
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Canadian Pension Fund Asset Allocation
Institutional pension funds hold aggregate positions in many asset classes. They also recognize that short-term asset class returns are not obvious outcomes, and that large tactical asset shifts are in fact very difficult to successfully complete consistently over time.
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Size and Value Effects Are Strong Around the World
The size and BtM effects appear in both US and international markets—strong evidence that the risk factors are systematic across the globe.
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Yearly Observations of the US Size, Value, and Market Premiums (3 slides)
The US small cap, value, and market premiums are well documented over the long term, but annual performance is neither consistent nor predictable.
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Performance of the S&P/TSX Composite Index (2 Slides)
The harsh reality of market efficiency has not stopped speculators and other traders from attempting to predict the future. On paper, market timing offers a seductive prospect: By predicting market direction ahead of time, a trader might capture only the best-performing days and avoid the worst.
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Performance of the S&P 500 Index (2 slides)
The harsh reality of market efficiency has not stopped speculators and other traders from attempting to predict the future. On paper, market timing offers a seductive prospect: By predicting market direction ahead of time, a trader might capture only the best-performing days and avoid the worst.
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Bull and Bear Markets
Recent Canadian S&P/TSX Composite, S&P 500 Index, MSCI EAFE (net div) and MSCI World Index (net div) and market history shows that bull market cycles last longer than bear market cycles, and produce cumulative gains that more than offset losses experienced during bear markets.
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Fees Matter
Active managers seek to beat the market through stock selection and market timing. They generally charge higher fees than passive managers as compensation for their perceived “skill.”
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The Size Effect
Over the long term, small cap stocks have offered a return premium above large cap stocks, although this performance is not consistent over shorter time frames.
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Value Stocks vs. Large Stocks
The following three slides underscore the importance of maintaining a long-term perspective in a structured portfolio and committing to one’s asset allocation.
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Small Stocks vs. Large Stocks
The size effect also proves itself over longer holding periods. The chart applies the same format to illustrate that risk factor compensation is also working in the small cap arena.
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Fixed Income vs. Large Stocks
The third slide in this format compares the performance of short-term fixed income instruments to the S&P 500 Index.
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Innovations in Finance (2 slides)
Financial science is a relatively young academic field. But the theories, research, and applications have significantly influenced investment methodology over the last half century. |
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Historical Asset Class Returns 1927 - 2008
This year's Dimensional Fund Advisor’s annual survey of investment returns focuses on global markets. Along with updated traditional matrices for Canadian equities and fixed income, the book features a fold-out illustration of the total equity investment opportunities available worldwide. |
