Morningstar Advisor - April/May 2013 - (Page 29)

2013 Morningstar Andex Chart ® ® 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 $18,365 The Past 30 Years $10,000 ﬁrst World Trade Center bombing Annual Net Asset Fund Flows (in billions) Balanced Portfolio U.S. Stock 10% 30% 20% 30% 10% International Stock 11.9% 9/11 $300B Bond Small Stocks Large Stocks World ex-U.S. Stocks Bonds Cash $200 Affordable Care Act ﬁrst iPhone Flash Crash $100 subprime crisis $0 $3,533 ($100) 9.8% $400,000 $1,000 30 year ﬁxed mortgage 18.63% $240,428 $217,197 $201,225 $169,812 $162,787 Growth of $10,000 (USD) with no acquisition costs or taxes and all income reinvested $100,000 30 year Gov’t bond 15.21% Bear Stearns’ collapse $700B bailout Wall Street Reform Act $35,337 WorldCom bankruptcy Tonkin resolution 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Sputnik John Glenn orbits earth Percentage Returns (December 2012) 1 Yr $100 5 Yr 10 Yr 20 Yr 30 Yr (1983–2012) 18.2 16.0 11.0 17.0 3.3 18.6 8.3 Small Stocks Large Stocks Balanced Portfolio World ex-U.S. Stocks Bonds Emerging Market Stocks (*1988) Gold 3 Yr 14.5 10.9 10.0 4.1 13.4 5.0 15.1 4.0 1.7 4.9 –2.9 9.3 –0.6 14.7 10.4 7.1 8.6 9.1 7.5 16.9 16.9 11.0 8.2 8.7 6.8 8.6 8.8 8.4 11.2 10.8 10.5 9.7 9.9 — 4.4 Worst 5 Yrs 0.76 1.00 — 0.69 0.03 0.67 * –0.08 20.9 17.2 10.7 23.1 11.9 35.9 * 15.0 AIG bailout Mexican peso collapses Neil Armstrong ﬁrst man on moon GM, Chrysler ﬁle for bankruptcy Long-Term Capital Mgmt rescued IRAs introduced Lehman Bros, WaMu bankruptcies mutual fund assets top $1 trillion Asian currency crisis S&L bailout Cuban missile crisis hurricanes Katrina & Rita hurricane Sandy $123 Russian debt default 5.7% Bay of Pigs Black Monday Suez Canal crisis NASDAQ Amex merge NAFTA takes effect Chrysler bailout $57 Berlin Wall torn down S&L deregulation color TV introduced banks & stock markets close for 9 days Fannie/Freddie takeover Persian Gulf War Keogh plans introduced Correlation to Large Stocks –8.9 –6.6 0.1 –6.5 3.9 –10.2 * –8.2 Risk U.S. debt downgraded Enron bankruptcy ﬁrst ETF ﬁrst money market fund Tet offensive $10,000 4.8% Cold War ends German reuniﬁcation Civil Rights Act passed $21 Social Security Act passed Berlin blockade Berlin Wall built 3.5% Japan surrenders Prohibition ends $13 Germany surrenders $10 3.0% Munich Conference D Day number of mutual funds exceeds 100 France falls Growth of $1 1 Yr 18.2 16.0 3 Yr 14.5 10.9 5 Yr 4.0 1.7 10 Yr 10.4 7.1 20 Yr 11.0 8.2 30 Yr 11.2 10.8 87 Yr 11.9 9.8 Risk 32.3 20.2 3.3 0.6 13.4 1.3 9.3 1.7 7.5 2.8 8.6 4.3 9.9 5.9 5.7 4.8 9.7 3.2 –3.3 1.0 30-Day Treasury Bills Inﬂation with no acquisition costs or taxes and all income reinvested Worst 5 Yrs –31.6 –17.4 Long-Term Government Bonds 5-Year Fixed-Term Investments Pearl Harbor 0.1 1.7 0.1 2.1 0.4 1.8 1.6 2.4 3.0 2.4 4.3 2.9 3.5 3.0 3.1 — 0.1 — Percentage Returns ﬁrst international mutual fund available in U.S. (December 31, 2012) U.S. Small Stock Total Return Index U.S. Large Stock Total Return Index $1 –0.1% 4.9% 0.6% 9.2% –2.0% 3.2% 0.4% 19.4% 5.4% –0.1% 1.9% 2.2% 7.8% 1.4% 3.9% 5.9% 2.5% 5.5% 6.3% 17.6% 7.4% 12.6% 8.9% 5.1% 18.2% 8.8% 4.9% –0.9% 2.9% 7.7% 2.8% 2.5% Compound Annual Returns by Decade 400% 200% 400% Expansion (%) 200% 3% 0% (200)% population (over 65) 8.1% population (over 65) 9.8% life expectancy M: 58.1, F: 61.6 Senate Korean War ROOSEVELT 24.9 EISENHOWER 2.5 KENNEDY JOHNSON 7.5 National Minimum Wage Law passed $0.25/hr FORD CARTER min wage $1.00 REAGAN 21.5% average sale price of a one-family house $19,300 CLINTON BUSH OBAMA 3.8 $100,800 min wage $2.30 min wage $4.25 10.0 $166,400 7.8 $295,300 min wage $5.15 30-Year Government Bond Yield Prime Interest Rate min wage $7.25 reintroduced 5% 0% 12-Month Rolling 1st class stamp 4¢ 1st class stamp 2¢ gold $20.67 per oz (since 1879) oil $2.04 U.S. per barrel 1st class stamp 8¢ gold's ﬁxed price of $35 per oz abandoned gold ﬁxed at $35 per oz 0.25 195 Arab oil embargo 12.60 2.57 oil discovered in Saudi Arabia 1st class stamp 20¢ 104 850 482 14.23 509 297 38.34 4.11 284 1st class stamp 45¢ 500 253 725 14.0% 7.9% 8.3% 9.6% Average Dividend Yield by Decade: 5.5% 5.7% 4.9% 3.2% 4.0% Trailing 12-Month 1,011 (5%) 1,895 713 31.70 40.65 10.82 37.22 77.05 10.40 Average Personal Saving Rate by Decade: 2.8% 30 15% 10% discontinued Inﬂation 0% 0 cut from 39.6% to 35% BUSH 10.8 $38,900 5% Median (15.5) raised from 28% to 39.6% record federal deﬁcit $1.4T Iraq War NIXON 3.4 10% (5%) record federal surplus $236B Vietnam War TRUMAN 14.6 15% cut from 70% to 28% cut from 91% to 70% raised from 63% to 91% HOOVER 1.9% unemployment life expectancy M: 76.3, F: 81.1 federal deﬁcit $290B World War II COOLIDGE population (over 65) 13.3% life expectancy M: 66.6, F: 73.1 top federal tax rate raised from 25% to 63% House 0% (200)% population (over 65) 5.5% 50.51 8.6% 5.5% 3.3% 4.2% 2.4% 145.31 113.39 77.72 30.28 BP oil spill 1.8% S&P 500 Price Earnings Ratio 30 Median (15.5) 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of the time period indicated. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. Furthermore, small stocks are more volatile than large stocks and are subject to signiﬁcant price ﬂuctuations, business risks, and are thinly traded. Recession data is from the National Bureau of Economic Research (NBER). NBER does not deﬁne a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a recurring period of decline in total output, income, employment, and trade usually lasting from six months to a year and marked by widespread contractions in many sectors of the economy. Gold prices are from London Bullion Market Association and represent the London P.M. daily closing prices per troy ounce. Oil prices are for West Texas Intermediate Crude per barrel from Morningstar. Gold and oil prices quoted in U.S. dollars. Market expansions, contractions, and recoveries are deﬁned for U.S. Large Stocks, which are representative of the stock market. A contraction is deﬁned by a decline in the stock market from its peak by 10% or more. A recovery is represented as the number of months from the bottom of a contraction to its previous peak. An expansion measures the subsequent performance of the index from the recovery until it reaches the next peak level before another 10% decline. Returns are compound annual returns, and risk is measured by standard deviation. Standard deviation measures the ﬂuctuation of returns around the arithmetic average return of the investment. The worst 5-year calculations are out of 985 rolling 60-month periods. Source: U.S. Small Stocks—Ibbotson® Small Company Stock Index; U.S. Large Stocks—Standard and Poor’s 90 index from 1926 through February 1957 and the S&P 500 index thereafter, which is an unmanaged group of securities and considered to be representative of the U.S. stock market in general; Long-Term Government Bonds—20-year U.S. government bond; 5-Year Fixed-Term Investments—yield on a 5-year U.S. government bond; 30-Day Treasury Bills—30-day U.S. Treasury bill; Inﬂation—Consumer Price Index; Prime Interest Rate—The Federal Reserve; 30-Year Government Bond Yield—The Federal Reserve; S&P 500 Price Earnings Ratio—Robert Shiller (Yale) from 1926–1999 and Morningstar thereafter. Life expectancy data from The National Center for Health Statistics, National Vital Statistics Reports. Minimum wage data from the U.S. Department of Labor. Federal deﬁcit data from usgovernmentspending.com. Federal tax rates from the Tax Foundation. Personal saving rate and unemployment data from the U.S. Bureau of Economic Analysis. Average house price and population statistics from the U.S. Census Bureau. Additional disclosure: The Past 30 Years—Hypothetical value of $10,000 invested at the beginning of 1983. The 1983 start date was selected to depict a retirement time horizon of 30 years. *The 1988 start date for emerging-market stocks is constrained by the maximum available historical data of the index. International investments involve special risks such as ﬂuctuations in currency, foreign taxation, economic and political risks, liquidity risks, and differences in accounting and ﬁnancial standards. Emerging-market investments are riskier than developed market investments. Gold, like any other coin or bullion, is subject to investment risks like perceived scarcity of coin, its quality, current demand, market sentiment, and economic factors. The balanced portfolio was created for illustrative purposes only. It is neither a recommendation, nor an actual portfolio. All income was reinvested and the portfolio was rebalanced every 12 months. Correlation is annualized. Asset classes can be positively or negatively correlated, or have no correlation at all. Perfect positive correlation between two assets is represented by +1, while perfect negative correlation is represented by –1. Uncorrelated assets assume the value of 0. The worst 5-year calculations are out of 301 (241 for emerging market stocks) rolling 60-month periods. Source: World ex-U.S. Stocks—Morgan Stanley Capital International (MSCI) World ex-U.S. Index; Bonds—20-year U.S. government bond; Emerging-Market Stocks—Morgan Stanley Capital International Emerging Markets Index; Gold— Federal Reserve (2nd London ﬁx) from 1983–1987 and Wall Street Journal London P.M. closing price thereafter. Annual Net Asset Fund Flows: U.S.-domiciled open-end fund ﬂows from Morningstar. Start date of 1994 constrained by data availability. U.S. Stock: funds that primarily invest in U.S. stocks; International Stock: funds that invest in speciﬁc regions or a diversiﬁed mix of international stocks with 40% or more in foreign stocks; Bond: taxable bond funds (government, corporate, international, emerging markets, high-yield, multisector) that invest primarily in ﬁxed-income securities of varying maturities. ©2013 Morningstar. All Rights Reserved. The reproduction of part or all of this chart without prior written consent from Morningstar® is prohibited. back into another recession. The Morningstar Andex chart demonstrates that periods of expansion, contraction, and recovery last for varying periods of time throughout history, and that it’s important for investors to keep their eyes on the long term. The contractions and expansions graph shows that the stock market may have declined by 51% between October 2007 and February 2009, but as of December 2012, the stock market has not only recovered all of its lost value but also expanded by about 3%. The Percentage Returns table also shows the worst five-year return of a balanced portfolio has been positive over the past 30 years. These and other statistics on the chart reinforce the significance of having a longterm focus. Communicate Effectively Advisors must balance maintaining appropriate levels of risk for their clients’ portfolios, while ensuring enough return to outpace inflation and meet retirement goals. In today’s volatile markets, communicating a clear vision is more important than ever. No matter what strategy you suggest to your clients, it is critical for them to understand the big picture. By walking through the important aspects of today’s investment landscape using the Morningstar Andex chart (including over 100 data points over the past 85+ years), you’ll set the stage for meaningful, productive, and rewarding conversations to follow. 0 bars represent recessions (National Bureau of Economic Research) Purchase Information Order the 2013 Morningstar Andex chart, available in handout or wallchart formats, at www.morningstar.com/goto/2013AndexChart, or call 1 888-4-CHARTS (24-2787). Bulk discounts available. Complimentary ‘Andex Guide: Getting Started’ provided with any order. ©2013 Morningstar, Inc. All rights reserved. The Morningstar name and logo are trademarks of Morningstar, Inc. Data displayed has been altered and is for illustrative purposes only. http://www.morningstar.com/goto/2013AndexChart http://www.morningstar.com/goto/2013AndexChart

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2013

Morningstar Advisor - April/May 2013
Contents
Contributors
Letter From the Editor
The Pursuit of Happiness and Financial Advice
What Strategies Do You Use to Control Risk?
Driven to Succeed for Clients and Family
How to Assess a Portfolio’s Bond Risk
Luck, Skill, and Investing
Investments á la Carte
Investment Briefs
Investing’s No- Brainers Have Costs
A Defensive Ride
Risk On/On Risk
The Risk of Being Overconfident
Year of Living Dangerously
The Risk-Parity Approach
A Guide to Mutual Funds Running Risk-Parity Strategies
What Moats Tell Us About Risk
Risk’s Wake-Up Call
Seeing Is Believing
Why Investors Lag the Returns of Their Funds
Liquidity Signals
Pump Them Up
Golden Oldies Keep on Truckin’
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Our Social Blind Spot

Morningstar Advisor - April/May 2013