A simple return attribution model is used to parse market returns over various time frames.
Did you know that from the US equity market low at the end of February 2009 to December 31, 2013, the S&P 500 (in US dollars) has generated a total return of 178.9% or 23.6% annuallized? While 2.3% annually has come from dividends, and 5.1% has come from nominal dividend growth, dividend revaluation has generated returns of 15.1% annualized, or 64% of the total, as yields have fallen from 3.8% to 1.9%.
We focus on helping investors understand the key elements in building an effective long-term investment program.
First, current market conditions can have a dramatic effect on expected returns for the long term, and making reasonable estimates of return and risk are among the most important activities for long-term investors. We suggest an analytical framework that both acknowledges the past, but that allows forecasts to evolve as market conditions change.
Second, cost control is a crucial element of investment return. Saving a known amount of certain cost is more beneficial than trying to obtain the same level of uncertain expected return.
Third, investors have to combine their evolving return and risk expectations, using the lowest cost investment vehicles, into an evolving asset allocation. For the average investor, essentially all of his return is determined by that allocation.
All of these points are examined in detail in the investment book How do you get THERE from HERE? Learning and Playing the Long-term Investment Game. Some related articles, and ongoing market analysis, is provided on this website.
These concepts apply to large institutional investors, for which this framework can provide a useful first-approximation forecasting framework that can apply across most asset classes. But this framework can also be of great use to smaller institutional investors, as well as to serious retail investors. In sum, thoughtful analysis applied within a rational long-term investment framework can help any investor take firmer control of his investment destiny.
Structured Capital presents a book by Tim Appelt:
Historical analysis of long-term global equity and bond returns is used to develop an analytical framework for a historical attribution of returns. In turn this attribution approach is used to develop expectations of future returns that acknowledge the past but take into account current market conditions.