Portfolio Risk Return Characteristics 20 Years Through July 2010

Chart of the Week for September 3 - September 9, 2010

In the August 20, 2010 chart, we discussed the possible benefits of holding a diversified portfolio.

The chart above helps to further illustrate the possible benefits of diversification, showing the 20-year risk and return characteristics of the BarCap U.S. Aggregate Bond Index (representing a bond portfolio), the S&P 500 Index (representing a large-cap stock portfolio), the Russell 2000 Index (representing a small-cap stock portfolio), and two portfolios that combine the indexes to produce Mixed Portfolios 1 and 2. Mixed Portfolio 1 represents the same mixed portfolio from the August 20, 2010 chart.

Mixed Portfolio 1 combines large-cap stocks and bonds in a 75%/25% mix, respectively, and over this time period, resulted in a return comparable to the large-cap stocks, but with less risk. Small-cap stocks were added as a third asset class to produce Mixed Portfolio 2, comprised of 50% large-cap stocks, and 25% each of small-cap stocks and bonds. Of the asset classes shown, small-cap stocks exhibited both the highest return and the highest risk characteristics over the period. But, because the returns did not move in lock step with the other assets in the portfolio, diversification added value over this time period, resulting in the return of Mixed Portfolio 2 being higher than Mixed Portfolio 1 without significantly affecting risk.

However, keep in mind that past performance does not guarantee future results and diversification does not protect an investor from market risks or assure a profit.

© Copyright 2010 ICMA Retirement Corporation, All Rights Reserved. The information herein was obtained from various sources. Although the information from third parties is believed to be accurate, it has not been independently verified by ICMA-RC. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. This information is intended for educational purposes only and is not to be construed as investment advice. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended here and should understand that statements regarding future prospects may not be realized. Investors should note that income from securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily indicative of future performance.