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Asset Class Winners and Losers
Highest return
Lowest return
Illustration of the annual performance of various asset classes in relation to one another. This chart is for illustrative purposes only. It does not reflect the performance of any specific investment. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Small Company Stocks—Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Large Company Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; International Stocks—Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE®) Index; Government Bonds—20-year U.S. Government Bond; Treasury Bills—30-day U.S. Treasury Bill. Indexes are unmanaged. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
19981990 1991 1992 1993 1994 1995 1996 1997 1999 2000 2001 20021989
Internat’lstocks
Large stocks
LT gov’t bonds
Large stocks
LT gov’t bonds
Large stocks
LT gov’t bonds
Large stocks
LT gov’t bonds
LT gov’t bonds
Internat’lstocks
LT gov’t bonds
Large stocks
Internat’lstocks
Large stocks
Internat’lstocks
LT gov’t bonds
30 dayT-bills
30 dayT-bills
30 dayT-bills
30 dayT-bills
30 dayT-bills
30 dayT-bills
LT gov’t bonds
Internat’lstocks
Small stocks
Small stocks
Small stocks
Small stocks
Small stocks
Small stocks
LT gov’t bonds
Large stocks
Internat’lstocks
Small stocks
2003
Smallstocks
Largestocks
LT gov’t bonds
30 dayT-bills
Internat’lstocks
Internat’lstocks
30 dayT-bills
LT gov’tbonds
Smallstocks
Internat’lstocks
Small stocks
Large stocks
LT gov’tbonds
Internat’lstocks
30 dayT-bills
LT gov’tbonds
Smallstocks
Internat’lstocks
Large stocks
30 dayT-bills
Internat’lstocks
BondsCash
Stocks
Analysis of Worst Performance of Merrill Lynch Asset Allocation Models Over 12-, 24- and 36-Month Periods, 1970–2003
Capital Preservation
Income
Income/Growth
Growth
Aggressive Growth
Merrill Lynch Asset Allocation Models
Worst Performance Over a
12-month period
Worst PerformanceOver a
24-Month Period
Worst PerformanceOver a
36-Month period
-11.97%
-18.56%
-22.55%
-27.49%
-32.19%
-4.86%
-8.72%
-11.11%
-14.04%
-17.66%
-0.92%
-3.11%
-4.47%
-7.50%
-11.53%
12-, 24- and 36-Month Periods, 1970–2003
Returns shown are based on indexes and are illustrative; they assume reinvestment of income, no transaction costs or taxes, and that the allocation for each model remained consistent. The allocation models shown are current as of 1/2004. Merrill Lynch has changed the models in the past and may do so in the future. Past performance does not guarantee future results. Index sources: Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Bonds—20-Year U.S. Government Bond; Cash—30-Day U.S. Treasury Bill. Direct investment cannot be made in an index. Source: Merrill Lynch Investment Strategy and Product Group/Strategic Planning. ©2002 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
25
15
10
10
1010
50
45
25
40
25
40
50
80
65
Annual Returns of Merrill Lynch Asset Allocation Models
637 Twelve-Month Rolling Periods, 1950–2003
Results shown are based on indexes and are illustrative; they assume reinvestment of income, no transaction costs or taxes, and that the allocation for each model remained consistent. The allocation models shown are current as of 1/2004. Merrill Lynch has changed the models in the past and may do so in the future. Past performance does not guarantee future results. Index sources: Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Bonds—20-Year U.S. Government Bond; Cash—30-Day U.S. Treasury Bill. Direct investment cannot be made in an index. Source: Merrill Lynch Investment Strategy and Product Group/Strategic Planning. ©2002 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
Best Annual Return
Average Annual Return
Worst Annual Return
Income Income/Growth Growth
37.48%
7.72%
-11.97%
40.05%
8.83%
-18.56%
43.74%
9.55%
-22.55%
47.93%
10.53%
-27.49%
52.16%
11.53%
-32.19%
Asset Allocation:
Bonds
Cash
Stocks
25 2550 40 1545 50 1040 65 1025 80 1010
Capital Preservation Aggressive Growth
Stocks, Bonds, Cash and Inflation
Although stocks on average performed the strongest historically, they were subject to the greatest variance in annual returns.
Summary Statistics 1926–2003
Large Company Stocks
GovernmentBonds 5.4% 9.4%
Inflation 3.0% 4.3%
Cash 3.7% 3.1%
CompoundAnnualReturn
Risk(StandardDeviation) Distribution of Annual Returns
SmallCompany Stocks 12.7% 33.3%
*
5.8%
3.1%
3.8%
ArithmeticAnnualReturn
17.5%
*The 1933 small company stock total return was 142.9%. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Large Company Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Small Company Stocks—represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the Dimensional Fund Advisors (DFA) Small company Fund thereafter; Government Bonds—20-year U.S. Government Bond; Cash—30-day U.S. Treasury Bill; Inflation—Consumer Price Index. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
10.4% 12.4% 20.4%
Stocks, Bonds, Cash and Inflation
Asset types perform differently, with stocks historically outperforming other asset categories. Note that risk and return are related; the higher the return, the greater the risk.
1925–2003EndingWealth
AverageReturn
Hypothetical value of $1 invested at year-end 1925. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Small Company Stocks—represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Large Company Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Government Bonds—20-year U.S. Government Bond; Cash—30 day U.S. Treasury Bill; Inflation—Consumer Price Index. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
$10 3.0%
Inflation
$.10
$1
$10
$1,000
$10,000$20,000
1925 1935 1945 1955 1965 1975 1985 2003
$100
1995
$18 3.7%
Treasury bills
$61 5.4%
Government bonds 10.4%$2,285Large company stocks $10,954 12.7%Small company stocks
Stocks and Bonds: Risk Versus Return
By investing in a mix of stocks and bonds, you can optimize risk and return.
1970–2003
9%
10%
11%
12%
13%
10% 11% 13% 15% 16% 17% 18%
100% bonds
25% 75% – Minimum risk portfolio
50% 50%
60% 40%
80% 20%
Maximum risk portfolio – 100% stocks
Risk
Re
turn
12% 14%
Risk is measured by standard deviation. Return is measured by arithmetic mean. Risk and return shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Bonds—20-year U.S. Government Bond. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
Reduction of Risk Over Time
Each bar shows the range of compound annual returns for each asset class over the period 1926–2003.
-75%
-50%
-25%
0%
25%
50%
75%
100%
125%
150%
10.4%12.7% 5.4% 3.7%
Small Company Stocks
Large CompanyStocks
GovernmentBonds
Cash
5-Year Holding Periods
1-Year Holding Periods
20-Year Holding Periods
Compound Annual Return
1926–2003
Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Small Company Stocks—represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Large Company Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Government Bonds—20-year U.S. Government Bond; Cash—30-day U.S. Treasury Bill. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
Potential to Reduce Risk or Increase Return
A change in diversification strategy can improve returns without increasing risk.
1970–2003
Risk is measured by standard deviation. Risk and return shown are based on indexes and are illustrative; they assume reinvestment of income, no transaction costs or taxes, and that the allocation for each portfolio remained consistent. Past performance is no guarantee of future results. Index source: Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Bonds—20-year U.S. Government Bond; Cash—30-day U.S. Treasury Bill. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
Fixed income portfolio
ReturnRisk
8.6%7.8%
Bonds 85%
Cash 15%
ReturnRisk
8.6%5.7%
Bonds37%
Stocks21%Cash
42%
Lower risk portfolio Higher return portfolio
ReturnRisk
9.4%7.8%
Bonds37%
Stocks35%
Cash28%
Diversified Portfolios and Bear Markets
Mid-1970s Recession
$1,149
$1,014
Jun1976
$500
$1,000
$1,500
Dec1972
Dec1973
Dec1974
Diversified portfolio
Stocks
Diversified portfolios historically perform better through recessions.
1987 Market Crash
Dec1990
$500
$1,000
$1,500
Jun1987
Jun1988
Jun1989
$1,324
$1,227
Diversified portfolio
Stocks
Diversified portfolios also historically perform better through bear markets.
Mid-1970s Recession: December 1972 through June 1976. 1987 Market Crash: June 1987 through December 1990. Diversified Portfolio: 35% stocks, 40% bonds, 25% cash. Hypothetical value of $1,000 invested at month-end December 1972 and June 1987, respectively. Diversification does not eliminate risk of experiencing investment losses. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Bonds—20-year U.S. Government Bond; Cash—30-day U.S. Treasury Bill. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
Bond Market Performance
Bonds typically carry less risk, but on average have not performed as well as stocks historically.
1925–2003
AverageReturn
EndingWealth
Hypothetical value of $1 invested at year-end 1925. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and is considered to be representative of the stock market in general; Corporate Bonds—Salomon Brothers Long-Term High-Grade Corporate Bond Index; Government Bonds—20-year U.S. Government Bond; Municipal Bonds—1926–1984, 20-year prime issues from Salomon Brothers’ Analytical Record of Yields and Yield Spreads and Moody’s Bond Record thereafter; Cash—30-day U.S. Treasury Bill. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
$.10
$1
$10
$100
$1,000
$10,000
1925 1935 1945 1955 1965 1975 1985 2003
3.7%$17.66
Treasury bills
1995
4.4%$27.71
Municipal bonds
5.4%$60.56
Government bonds
5.9%$86.82
Corporate bonds10.4%$2,285
Stocks
Relationship Between Bond Prices and Yields
When yields increase, bond prices decrease.
Price and yield are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index source: Government Bond—20-year U.S. Government Bond. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
$0
$.20
$.40
$.60
$.80
$1.00
$1.20
$1.40
$1.60
1925 1935 1945 1955 1965 1975 1985 2003
0%
2%
4%
6%
8%
10%
12%
14%
16%
Bond yields (%)Bond prices ($)
1995
Stock Performance During Recessions
Although stocks dip through recessions, they typically recover and perform better than before.
1945–2003
Hypothetical value of $1 invested at year-end 1945. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Recessions—National Bureau of Economic Research. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
1949
19541958
1960
19701974 1980
1982
1990
2001
$1
$10
$100
$.10
$1,000
1945 1955 1965 1975 1985 20031995
Shaded regions denote economic recessions
Stocks and Real Assets
Over the past 20 years, stocks on average have outperformed most real assets.
1983–2003
Hypothetical value of $1 invested at year-end 1983. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: U.S. Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; International Stocks—Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE®) Index; Commodities—Goldman Sachs Commodity Index; Real Estate—NCREIF Property Index; Gold—1977–1987, Federal Reserve (2nd London fix), Wall Street Journal London P.M. closing price thereafter. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
$1.10
Ending
wealth
$8.26$11.50
$4.28$5.91
Average
return
0.5%
11.1%13.0%
7.5%9.3%
Gold
International stocksU.S. stocks
Real estateCommodities
$.10
$1
$10
$100
1983 1987 1991 1995 1999 2003
Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and is considered to be representative of the stock market in general; Bonds—20-year U.S. Government Bond; Cash—U.S. 30-day Treasury Bill; Inflation—Consumer Price Index. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
Returns Before and After Inflation
The following chart illustrates the impact of inflation on performance.
1926–2003
Co
mp
ou
nd
An
nu
al
Re
turn
Bonds Cash
10.4%
5.4%
3.7%
Stocks
7.2%
2.3%
0.7%
0%
4%
8%
12%
10%
6%
2%
Before Inflation
After Inflation
Dollar Cost Averaging
Dollar cost averaging creates opportunities to lower the average cost per share.
0
10
20
30
40
50
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Units
$0
$10.00
$20.00
$30.00
$40.00
Price/Unit
$22.50
$21.05
Average share price
DCA price
Number of units
Price
Hypothetical illustration of a $600 quarterly investment. Dollar cost averaging does not ensure a profit or protect against a loss in declining markets. Dollar cost averaging involves continuous investment regardless of fluctuating prices. Investors should consider their financial ability to continue purchases through periods of low price levels. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
$11.50
$2.71 $2.79
$0
$5
$10
$15
S&P 500 S&P 500 minusbest 17 months
Cash
Dangers of Market Timing
Market timing can be an unreliable and hazardous practice. Missing only a fraction of time can have a profound impact on value.
Hypothetical Value of $1 Invested From Year-End 1983–2003
Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: S&P 500—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Cash—30-day U.S. Treasury Bill. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
Long-Term Dangers of Market Timing
The impact of mistakes in market timing are more apparent when viewed over the long term.
Hypothetical Value of $1 Invested From Year-End 1925–2003
Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. Index sources: S&P 500—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Cash—30-day U.S. Treasury Bill. Direct investment cannot be made in an index. Used with permission. ©2003 Ibbotson Associates, Inc. All rights reserved. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.]
$2,285
$17.42 $17.66$0
$500
$1,000
$1,500
$2,000
S&P 500 S&P 500 minusbest 37 months
Cash
$2,500
