IFA
Index Porfolio 90
IFA
Index Porfolio 70
IFA
Index Porfolio 50
IFA
Index Porfolio 30
IFA
Index Porfolio 10
Step 9 - History
FAMILIARIZE YOURSELF WITH THE HISTORICAL RISKS AND RETURNS OF INDEXES
Long-term data is required to improve the estimates of the expected risk and return for different investments. We now have 81 years of monthly risk and return data on several important indexes. Since you cannot predict the future based on a small sample of recent events, the study of long-term stock market data is the only source of meaningful information and the resulting probability distributions of the expected risk and return of investments.
The groundbreaking discoveries achieved by Nobel-prize winning economists are the springboard for IFA’s investing strategies. Implementing the important risk diversification methodologies set forth by Markowitz, Sharpe and Miller — the fathers of Modern Portfolio Theory, IFA’s Index Portfolios expand upon their legendary achievements. IFA’s 20 Index Portfolios are constructed according to the important empirical research of Eugene Fama and Kenneth French. The two now renowned economists made the groundbreaking discovery that more than 90% of stock market returns come from exposure to three specific risk factors: market, size and value. |
The chart below illustrates
the impact of size and value investing across global asset
classes. In the chart, you see 82 years of history for U.S.
Large and Small Capitalization Stocks, 27 years of history
for Non-U.S. Developed Markets and 20 years for Emerging
Markets. Across each asset class represented here, we see
that small and value carry greater risk and return characteristics
for each time period shown. Fama and French’s discovery of
the significant increase in risk and return for small and
value enables institutional investors to isolate those specific
risk factors in specific indexes to achieve higher expected
returns that are commensurate with their designated risk
capacity. |
Additional Charts and Graph from Step 9
| < Step 8 - Riskese | Step 10: Risk Capacity> |