Investing Videos

Education || Step 9 : History

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Step 9

Introduction

Only a good understanding of the long-term historical risk and return of various indexes will enable you to know how to allocate indexes in accordance with your own unique Risk Capacity™. In this Step we provide you data on the risk and return characteristics of both size and value subsets of markets around the world. For some indexes, we have data going back to 1926. This summarized data is meant to give you a general overview.

In Step 10, we will be much more specific as to the various combinations of these indexes to create whole portfolios of 20 different levels of risk.

Step 9

Quotes

	" It takes between 20 and 800 years of monitoring performance to statistically prove that a money manager is skillful rather than lucky - which is a lot more than most people have in mind when they say 'long-term' [track record]. "
		Ted Aronson, "Confessions of a Fund Pro", Money, Feb 1999, pp. 73-75.

	*" The four most dangerous words in investing are, It's different this time. "*
		Sir John Templeton, legendary investor. Money Magazine, Fall 2002, p. 25

	" Those who are ignorant of investment history are bound to repeat it. Historical investment returns and risks of various asset classes should be studied. Investment results for an asset over a long enough period (greater than 20 years) are a good guide to the future returns and risks of that asset. Further, it should be possible to approximate the future long-term return and risk of a portfolio consisting of such assets."
		William Bernstein, "The Intelligent Asset Allocator"

	*" I know of no way of judging the future but by the past. "*
		Patrick Henry, March 23, 1775, Virginia Convention Speech

	*" The only new thing in the world is the history you don't know. "*
		Harry S. Truman

Step 9

Definitions

Historical Databases and Studies

Several different historical databases are used to study the market. One of the first was the Cowles Commission's Common-Stock Indexes, spearheaded by Alfred Cowles. The Common-Stock Indexes were created in order to portray the average experience of investors who invested in those securities from 1871 to 1938. The compilation of the data was no easy task. Remember, it was assembled without the help of modern computer technology. The data, which was published in August 1938, was the product of years of research and data collection. According to Cowles, more than 1.5 million worksheet entries were made (and we're not talking about Excel worksheets!).

12-Step Program

   »  Step 1 - Active Investors
   »  Step 2 - Nobel Laureates
   »  Step 3 - Stock Pickers
   »  Step 4 - Time Pickers
   »  Step 5 - Manager Pickers
   »  Step 6 - Style Drifters
   »  Step 7 - Silent Partners
   »  Step 8 - Riskese
   »  Step 9 - History
   »  Step 10 - Risk Capacity
   »  Step 11 - Risk Exposure
   »  Step 12 - Invest and Relax