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When risks show up
Robert T 07-11-2007, 3:10 PM | Post #2411309 | 
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Severe bear markets since 1790.

TSM Nominal Returns

1836-1842.................-48.3%
1853-1859.................-36.9%
Sept. 1929 - June 1932....-83.4%
Jan 1973 - Sept. 1974.....-42.6%

Source: Ibbotson and Brinson

Most severe was September 1929 to June 1932 - what happened to value stocks over this period?

The US equity market declined 83%, small value stocks declined 88% while micro-cap stocks declined 89%

Over the same period the returns for T-bills, intermediate treasuries, and long-term treasuries were 6.0%, 13% and 14% respectively.

A portfolio with 75 percent in equities with a value and small cap tilt (0.2 and 0.4 size and value loading), and 25 percent in intermediate treasuries would have declined 74 percent.

If the 75 percent equity allocation was simply a total market allocation, the portfolio would have declined 72 percent.

It would have taken 10 years for the value and small cap tilted portfolio to recover to its 1929 nominal level - several months before the total market portfolio.

If the value and small cap tilted portfolio was 100% equities (no fixed income), it would have declined by 85 percent and taken 11 years (132 months) to surpass its 1929 level and 19 years to surpass the value of the portfolio with the same value and small cap tilt but with 25% in fixed income (intermediate treasuries).

UK equity market returns for 1929, 1930, and 1931 were -12.3, -11.5, -15.5.

The above portfolios were rebalanced monthly.

A fixed income and non-US allocation would have certainly helped during this period - but certainly significant declines..

These are from the interviews posted on the DFA website.

From Eugene Fama

Q: So you're saying that I expect to make more money when I buy value stocks than I do when I buy growth stocks.

A: Right. On average. Of course, sometimes you get clobbered.

From Rex Sinquefield

Q: So basically, there is no free lunch.

A: No free lunch at all. That's the essence. There are ways to get higher returns and lower returns but they all come at a price.

Just some observations.

Robert
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Originally posted in thread: 59459
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