How will you Get an 8% Return on Investment in a Year ?
Many American commentators call the first decade of the 21st century the unflattering title “the lost decade of investors.” The reason for this is that long-term investment portfolios built on the assumptions that have been accepted so far have yielded negative real returns.
The S & P500 index, which is considered the representative of the US stock market, has yielded an average annual return (in dollar terms) of 1% over the past decade. The MSCI EAFE index, which represents the developed countries outside the US, also yielded an average annual return of 1.6 percent (in dollar terms), because the average annual inflation rate in the US over the past decade was 2.6 percent, The US savings portfolio for the long-term savers is a balanced portfolio called the 60-40 portfolio, which consists of 60 percent of US corporate shares and 40 percent of US bonds.
The average annual yield of the 60-40 portfolio, which is measured by the S & P 500 Index and the general US bond index (which includes government bonds and corporate bonds), was 2.5 percent in the last decade – less than the inflation rate. Moreover, many pension portfolios failed to achieve even this return due to high management fees and erroneous transitions between investment channels.
The standard saving model in the US, according to which investment consultants recommend the desired saving rate for pensions, assumes an average annual rate of return of 8% – more than three times the yield attained by the actual 60-40 portfolio.
Despite this gloomy picture, the investors’ situation did not have to be so bad – at least that’s what Robert Arnott and John West say in a recent article titled “Was It Really A Lost Decade?” Arnott is the chairman and founder of Research Affiliates, which develops basic metrics, while West serves as product development manager for the same company.
The main reason for the worst returns in the past decade, West and Arnott says, is that the typical US investment portfolio is not sufficiently dispersed and poorly structured, and the conventional assumption that investing in the S & P 500 companies creates sufficient diversification is wrong. To illustrate their claim, West and Arnott present a list of investment channels with their yields over the last decade.
Decade of the REIT funds
Surprisingly, REITs have been the most profitable share in the past decade, yielding an average annual return of 10.2% despite the crisis in the real estate sector, and an investment in the Emerging Markets stock index yielded an average annual yield of 10.1%. Emerging-market government bonds yielded an annual yield of 10.9 percent, and even an investment in the US government’s index-linked bond index yielded a handsome 7.7 percent return. Which because of their dominant weight in all share indices dragged the investment portfolios to such low yields.
According to West and Arnott, this is the root of the problem. The accepted weighting method of the stock indices is based on the assumption that the market is efficient and that the prices of the shares reflect in each situation the economic value of the companies. But the last decade, when investors experienced both the technology bubble and the real estate bubble, clearly demonstrated that this assumption is not true: When bubble bubbles in the markets swell, the proportion of firms whose market value swells becomes dominant within stock indices. The bubble yields of market indices down.
A simple way for investors to overcome this problem is to build their portfolio so that each investment channel has equal weight. To illustrate, we will look at a portfolio that maintains a ratio of 60-40 between stocks and bonds, but each investment channel receives equal weight.The share component in the portfolio includes five share indices (each of which receives a weight of 12%): the S & P 500 index Large US companies), the MSCI EAFE index (large companies in developed countries outside the US), the Russell 2000 index (small US companies), the REIT index and the emerging markets share index.
The bond component in the portfolio includes four bond indices (each of which receives a weight of 10%): the US government’s CPI-indexed bonds index, the general bond index in the US, the high yield index ) And the emerging markets bond index.
Such a portfolio, which was composed on January 1, 2000 and was left alone for ten years, would yield an average annual yield of 6.7%. This yield is significantly higher than the yield attained by a standard 60-40 portfolio, and certainly would not justify the title of the “lost decade”. But the HFT Forex Robots are trading exactly, stably, and pre-defined algorithmic strategies for yielding a High Return on Investment – Click on High Gain Managed Account !
