Fixed-Rate Annuities Annuities have been around for over two thousand years. In Roman times, they were called annua, or annual stipends. In return for a lump sum payment, these contracts promised to pay buyers a fixed yearly payment for life; sometimes for a specified period. Annuities have been available for over two centuries in the U.S. In 1812, the Pennsylvania Co. for Insurance began selling annuities and life insurance. Fixed-rate annuities are often compared to government securities since both provide guarantees.
Fixed-Rate Annuities vs. U.S. Government Bonds Annuity
Bond
Annuity
• Can avoid taxes during life
• No reinvestment risk
• Tax-advantaged income
• No market risk
• No broker cost to buy or sell
• No interest rate risk
• Free-look period
• No bid-ask spread concerns
• At death, probate avoidance
• Possible creditor protection
• Tax-deferred growth
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• Principal always guaranteed
Bond
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Annuities are the only investment vehicle with guaranteed lifetime income. In return for lifetime income, the investor gives up principal in return for monthly or annual income; the shorter the life expectancy, the higher the payments. Converting an annuity to guaranteed lifetime income (annuitization) also means tax-advantaged income. For a male age 70, for every $9,000 received, only $2,610 is taxable (an exclusion ratio of 71%).
2011 Annual Lifetime Income from a $100,000 Immediate Annuity 55
60
male
$6,500
$7,100
female
$6,100
$6,500
m&f*
$5,800
$6,100
65
70
75
80
85
$7,800
$9,000
$10,400
$13,000
$15,900
$7,300
$8,100
$9,400
$11,800
$14,700
$6,600
$7,300
$8,200
$9,800
$12,500
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age
* both spouses are same age; payments remain level as long as either spouse is alive
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An annuity can be structured so that each year the income stream is adjusted by inflation (CPI). As the table below shows, this is not usually recommended since payments are initially 39% lower (e.g., female age 55: $3,700 vs. $6,100 w/o CPI).
2011 Annual Lifetime Income from a $100,000 Immediate Annuity [With Annual CPI Increase]
age
55
60
65
70
75
80
85
male
$4,400
$5,100
$6,000
$7,000
$8,800
$10,500
$13,200
female
$3,700
$4,200
$4,900
$5,800
$7,200
$8,800
$11,300
Projecting life expectancy can be important when deciding whether or not lifetime annuitization (income) for a portion of one’s portfolio should be considered. Assuming average or better-than-average health, the older the investor, the more an immediate annuity makes sense—if there are no heirs. Someone younger than 65 should also look at other income-generating methods, such as a systematic withdrawal plan with a balanced (stock/bond) mutual fund.
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Medicare 2011 Medicare is for people age 62-67 and older (age depends on when Social Security retirement benefits begin). Medicare claims are paid by commercial insurance companies under contract with the Centers for Medicare & Medicaid Services (CMS). Part A covers hospital care, skilled nursing home care, post-hospital home health care and, in some cases, hospice care. Part B covers doctor services, outpatient care, physical therapy, ambulance trips, medical equipment and other services not covered by Part A. Part C (Medicare Advantage) includes extra benefits. Part D is the prescription drug plan; for 2011, the average monthly premium for Part D is $41 a month.
Benefit
You Pay
Medicare Pays
1st 60 days
$1,132 flat fee
balance
61st to 90th day
$283 a day
balance
91st to 150th day*
$566 a day
balance
beyond 150 days
all costs
nothing
nothing
all (as approved)
$142 a day
balance
all costs
nothing
1st 100 days
nothing for services
all
in spell of illness
20% for durable medical equipment
balance
unlimited (doctor certified)
outpatient drugs + respite care
balance
$162 deductible + 20% remaining
all
nothing
all
nothing for services (20% for equipment)
balance
$162 deductible + 20% of remaining
balance
1st 20 days Nursing Facility
next 80 days
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beyond 100 days Home Health Care
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Hospice Care
Medical (Part B)
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Hospitalization
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Hospital (Part A)
D
Medical Expenses Lab Services
Home Health Care Outpatient Hospital
unlimited
*the 91st to 150th day are the 60 reserve days that may only be used once in a lifetime
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Certified Fund Specialist® – CFS® Certified Annuity Specialist® – CAS® Certified Estate and Trust Specialist™ – CES™ Certified Income Specialist™ – CIS™ Certified Tax Specialist™ – CTS™ Master of Science in Financial Services – MSFS
Social Security 2011 Eligibility for benefits is based on acquiring 40 quarters of coverage. Thereafter, benefits are determined by averaging the worker’s highest 35 years of work. If a worker takes benefits before normal retirement age, benefits are permanently reduced—and so are any spousal benefits. A spouse age 62 or older is entitled to the larger of his/her own work record or ½ of the other spouse’s benefits. A divorced spouse who has not remarried is entitled to the same spousal benefit if the marriage lasted at least 10 years. Social Security mails out a retirement benefits letter each year to workers. You can also go online (www.ssa.gov) to find out your expected monthly benefits at age 62, your normal retirement age and at age 70.
Normal Retirement
Birth Year
1940
65 years, 6 months
1956
1941
65 years, 8 months
1942
65 years, 10 months
1943-1954
66 years
1955
66 years, 4 months
Normal Retirement
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Birth Year
66 years, 4 months 66 years, 6 months
1958
66 years, 8 months
1959
66 years, 10 months
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1957
1960 +
67 years
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Normal Retirement Age For 2011, the maximum Social Security benefit (full retirement age) is $2,346 per month; the average benefit is $1,200 ($1,900 if both spouses worked). The table below provides examples of the monthly benefit an individual could expect, depending upon current earnings from work and date of birth. The table assumes “normal retirement age” (note: increase these benefits by 50% if you have a non-working spouse who is at least as old as the retiring worker).
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Normal Retirement Age Security Benefits
normal age if:
born 1948
born 1949-53
born 1954-58
born 1959-63
earnings
monthly benefit
monthly benefit
monthly benefit
monthly benefit
$50,000
$1,500
$1,600
$1,700
$1,800
$70,000
$1,800
$1,900
$2,000
$2,100
$90,000
$2,000
$2,100
$2,200
$2,300
$107,000+
$2,160
$2,160
$2,280
$2,370
INSTITUTE of BUSINESS & FINANCE Since 1988
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Real Estate FHFA is the federal agency regulating Fannie Mae, Freddie Mac and 12 Federal Home Loan Banks. The index below represents home sales throughout the U.S. The REIT index is comprised of all publicly traded equity REITs in the U.S.
Home Prices vs. REITs REIT Index
REITs > Homes
1991
2.9%
35.7%
1992
2.2%
14.6%
1993
2.4%
19.6%
1994
1.3%
3.2%
1995
4.6%
15.3%
1996
2.7%
35.3%
1997
4.6%
20.3%
1998
5.0%
-17.5%
1999
4.9%
-4.6%
2000
7.2%
26.4%
2001
7.3%
2002
6.9%
2003
7.0%
2004
10.4%
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FHFA Index
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13.9%
3.8%
37.1%
12.2%
4.7%
35.1%
-0.4%
-15.7%
-4.9%
-37.7%
-4.3%
28.0%
-1.3%
28.0%
average annual return # of losing years
3.3% 4 out of 20
14.2% 4 out of 20
average losing year
-2.7%
-18.9%
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31.6%
11.1%
2005 2006 2007 2009
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2010
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2008
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The drop in real estate home prices since 2007 may be greater than the figures shown above. According to the S&P/Case-Shiller index of 14 major cities, from the 2006 peak to the end of 2010, home prices dropped 31% (vs. a loss of 10.5% using FHFA numbers for 2007-2010). During most periods, equity REITs outperform residential real estate—especially if you factor in costs of ownership (e.g., 7% selling commission and closing cost, 1-2% a year in property taxes and 1-2% a year in repairs and replacements plus some amount for maintenance and management if the home is rented). The costs of home ownership are not reflected in the FHFA Index figures above.
Mutual Funds: Large Cap vs. Med-Term Government Bonds vs. Real Estate Stocks Bonds Real Estate
2000 -1% 11% 29%
2001 -9% 7% 10%
INSTITUTE of BUSINESS & FINANCE Since 1988
2002 -21% 9% 4%
2003 29% 2% 37%
2004 11% 3% 32%
2005 6% 2% 11%
2006 15% 4% 33%
2007 6% 6% -17%
2008 -38% 5% -39%
2009 29% 5% 31%
2010 14% 6% 27%
Certified Fund Specialist® – CFS® Certified Annuity Specialist® – CAS® Certified Estate and Trust Specialist™ – CES™ Certified Income Specialist™ – CIS™ Certified Tax Specialist™ – CTS™ Master of Science in Financial Services – MSFS
Commodities Growth of $1 [1926-2010]
Growth of $1 [1981-2010]
Wheat (bushel)
$4.23
Wheat (bushel)
$1.31
Inflation
$12.23
Silver
$1.50
T-bills
$20.55
Gold
$2.41
Silver
$30.91
Inflation
$2.54
Gold
$68.85
Oil (barrel)
$2.61
5-Year Gov’t Bonds
$84.12
T-bills
$4.48
20-Year Gov’t Bonds
$92.94
5-Year Gov’t Bonds
$11.59
Oil (barrel)
$107.51
20-Year Gov’t Bonds
$18.33 $21.19
$2,982.24
S&P 500
Small Stocks
$16,054.70
Small Stocks
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S&P 500
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$30.64
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In 1934, the Bureau of Labor Statistics began to gather daily commodity prices. This information eventually became the CRB Spot Market Price Index, price changes for 22 actively traded commodities. The CRB Index is equally weighted; each component comprises the same weight and importance in the index. Since 1947, the inflation-adjusted price of the CRB index has steadily fallen, with two exceptions—the 1970s and late 2000s. The inflation-adjusted annual decline of the CRB Index has been ~1% per year over the past 63 years. This translates into a cumulative, inflation-adjusted loss of 40%. Although these numbers are quite surprising, they are logical once things like new technologies, recovery systems, increased foreign competition, price controls, tariffs and substitutes paid for by governments are factored in.
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The notion certain commodity prices are destined for permanently higher prices (“they’re not making any more oil…or land”) is likely to be proven false. After all, newspapers have carried stories about oil shortages since the early 1900s. The first large oil field in Pennsylvania resulted in oil selling for $20 a barrel, well over a hundred years ago. A year later, the price dropped 99.5% to 10¢ a barrel due to new discoveries. During the Civil War, a barrel of oil cost $168 in 2011 dollars. Over the past 30 years, the average annual gain for oil, adjusted for inflation was 0.014%; an annual return much lower than money market funds.
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Typically energy dominates commodity markets and generally represents roughly 80% of the value of all commodities traded (since currencies are not considered a traditional commodity and not included in most indexes). This means capitalization-weighted indexes are heavily influenced by energy prices. The S&P GSCI Total Return Index reflects returns from 24 physical commodity unleveraged contracts plus the T-bill rate of interest earned on funds committed to the trading of the underlying contracts; the index is weighted: 68% energy, 17% agriculture, 8% industrial materials, 4% livestock and 3% precious metals. The index does not reflect any expenses or costs. Natural Resources Funds include 170 mutual funds and is also weighted (49% in industrial materials and 37% in energy). The index and mutual fund category both have betas over 1.0 and standard deviations over 31%; the mutual fund figures are net of expenses.
S&P Commodity Index vs. Natural Resources Mutual Funds 2010
2009
2008
3-year annualized
5-year annualized
10-year annualized
15-year annualized
S&P GSCI Index
9%
13%
-47%
-13%
-6%
2%
4%
Natural Resources Funds
19%
50%
-49%
-3%
9%
14%
12%
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© 2011 Institute of Business & Finance
Asset Allocation A goal of asset allocation is to obtain the highest possible returns with an acceptable risk level. One cannot say a portfolio should or should not include stocks, bonds or any other asset class until the investor’s risk level and time horizon are known.
1981-2010: Annual Range of Returns 0% stocks 100% bonds
30% stocks 70% bonds
50% stocks 50% bonds
70% stocks 30% bonds
100% stocks 0% bonds
40% -15% 13% 8% 5.5%
35% -5% 15% 6% 7.2%
35% -10% 16% 4% 8.2%
36% -22% 17% 2% 9.0%
38% -37% 18% -1% 9.9%
Best year Worst year Best decade* Worst decade* AVERAGE**
* annualized ** annualized returns from 1926-2010 note: bonds = 20-year U.S. Government / stocks = S&P 500 / decade = 1980s, 1990s or 2000s
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Portfolio
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A portfolio’s long-term results and risk are largely based on its equity/fixed income mix. Equities represent an ownership interest and include: stocks, real estate and commodities (gold, oil, wheat, etc.). Fixed income represents a debt and includes: bonds, bank CDs and government securities. Hybrids have features or traits of equities and fixed income and include: asset allocation portfolios, target-date retirement accounts, balanced funds, convertibles and high-yield bonds.
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A mutual fund, ETF and variable annuity are investment vehicles and classified as an equity, debt or hybrid, depending upon how the money is invested. Standard deviation (SD) is the most commonly used measurement for risk and shows an asset’s historical range of returns. The greater the SD, the less predictable the expected future return. Generally, an asset’s SD varies less that its return from year to year. This means SD has been a more accurate predictor than past returns.
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Mutual Fund Annualized Returns and Standard Deviation [1986-2010] Risk
Return
Bond Category
Risk
Return
16
7%
Short-term gov’t
2
4%
17
7%
Med-term gov’t
4
5%
19
7%
TIPS
7
5%
19
6%
Multi-sector
7
7%
20
9%
World
7
6%
Small cap
20
10%
Bank loan
8
4%
Emerging markets
24
9%
High-yield
10
6%
Natural resources
25
12%
Balanced (stock/bond)
11
6%
Real estate
25
10%
Emerging markets
11
9%
Metals
35
10%
Long-term gov’t
13
6%
Stock Category
N
Utilities Large cap
Mid cap
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EAFE
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World
INSTITUTE of BUSINESS & FINANCE Since 1988
Certified Fund Specialist® – CFS® Certified Annuity Specialist® – CAS® Certified Estate and Trust Specialist™ – CES™ Certified Income Specialist™ – CIS™ Certified Tax Specialist™ – CTS™ Master of Science in Financial Services – MSFS
2011 Income Taxes Single If Taxable Income Is: over but not > $0 $8,500 8,500 34,500 34,500 83,600 83,600 174,400 174,400 379,150 379,150 --
Married or Surviving Spouse
The Gross Tax Payable Is: pay plus of $ > $0 10% $0 850 15% 8,500 4,750 25% 34,500 17,025 28% 83,600 42,449 33% 174,400 110,016 35% 379,150
If Taxable Income Is: over but not > $0 $17,000 17,000 69,000 69,000 139,350 139,350 212,300 212,300 379,150 379,150 --
The Gross Tax Payable Is: pay plus of $ > $0 10% $0 1,700 15% 17,000 9,500 25% 69,000 27,617 28% 139,350 45,323 33% 212,300 106,637 35% 379,150
filing notes: must file as single if unmarried or legally separated by divorce or decree by Dec. 31st; if spouse dies during the year, taxpayer files as married for that year; to qualify as surviving spouse, dependent child must live at home—after 2-year period, surviving spouse often qualifies for head of household filing status.
Determining Tax Liability
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Gross Income (wages, taxable interest, IRA distributions, pension and annuity distributions, unemployment compensation and Social Security benefits) (0% or 15% dividends and long-term capital gains tax rate, based on IRS Qualifying Dividends and Capital Gain Tax Worksheet)
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– Deductions for Adjusted Gross Income (business expenses, alimony, student loan interest, qualified plan contributions)
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= Adjusted Gross Income (AGI) – Greater of Itemized Deductions or Standard Deduction ($5,800 single, $11,600 married, $11,600 widow or $8,500 head of household) – Additional Deduction (if age 65 or older: $1,450 if single or $1,150 for each spouse age 65 or older or surviving spouse) – Personal Exemption ($3,700 per person—each spouse gets an exemption) – Dependency Exemption ($3,000 per qualifying exemption) Taxable Income Tax Rate (0%, 15%, 25%, 28%, 33% or 35%)
= – +
Gross Tax Liability Tax Credits and Prepayments (e.g., $1,000 credit per qualifying child; note AGI phase out) Self Employment Tax (attach Schedule SE)
= – – –
Total Tax Federal Tax Withheld From W-2 and 1099 Estimated Tax Payments Already Paid American Opportunity Credit (up to $2,500 annually for post-secondary education)
=
Tax Due or Refund
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= x
Long-Term Capital Gains and Qualifying Dividends
Gain from property held 12 months or less is deemed to be short-term capital gain and is taxed at ordinary income tax rates. The 2011 rates on long-term capital gains and qualifying stock dividends are:
ordinary tax bracket
capital gains rate
stock dividend rate
10% and 15%
0%
0%
all others
15%
15%
Personal Residence
A seller of any age who has owned and used a home as a personal residence for at least two of the last five years before the sale can exclude from income up to $250,000 of gain ($500,000 for joint return filers); can be used once every two years.
INSTITUTE of BUSINESS & FINANCE Since 1988
Certified Fund Specialist® – CFS® Certified Annuity Specialist® – CAS® Certified Estate and Trust Specialist™ – CES™ Certified Income Specialist™ – CIS™ Certified Tax Specialist™ – CTS™ Master of Science in Financial Services – MSFS
Retirement and Education Plans Retirement Plans
Education Plans
Type of Retirement Plan
Annual Contribution Limit
Type of Educational Account
Traditional or Roth IRA
$5,000 ($6,000 if age 50+)
529 Plan
SEP IRA
$49,000 (or 25% of salary if less)
Defined contribution plan
$49,000 (or 25% of salary if less)
Defined benefit
$195,000 (earnings formula)
401(k), Roth 401(k), 403(b) or 457(b) plan
$16,500 (+ $5,500 if age 50+) = employee’s limit
Individual 401(k) plan
$49,000 (+ $5,500 if age 50+)
Any 401(k) with participant + employer contributions
$49,000 (or 25% of salary if less) + $5,500 if age 50+
Traditional IRA Phase-outs
iBonds
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Unlike 529, can be used for college or K-12.
Combines fixed rate and a semiannual inflation rate; interest is credited monthly and paid when you cash in the bond. Tax-deferral for up to 30 years. Tax-free income if used for educational purposes.
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The deduction for a traditional IRA contribution is phased out for single and head of household who are active participants in an employer-sponsored retirement plan and have modified AGI between $56,000 and $66,000. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employersponsored retirement plan, the income phase-out range is $90,000 to $110,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000.
Coverdell Education Savings Account (ESA)
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$11,500 (or 100% of salary if less) + $2,500 if age 50+
SIMPLE IRA
No age limits; open to adults and children.Some mutual funds offer 20+ choices ranging from conservative to aggressive; some states offer tax credits or deductions for contributions.
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Roth IRA Phase-outs, Contributions and Withdrawals
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The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to $179,000 for married couples filing jointly. For single and head of household, the phase-out range is $107,000 to $122,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range is $0 to $10,000. Unlike other plans, with Roth accounts: (1) withdrawals are tax-free (if age 59½ and account is at least 5 years old), (2) contributions are never deductible and (3) contributions can be taken out at anytime without penalty or tax.
UGMA and UTMA Accounts
Can be used for anything for the child (tax status depends solely on type of investment used). First $950 of annual taxable income is taxfree; second $950 is taxed at child’s bracket (income above $1,900 is taxed at parents’ rate).
Roth IRA
Can be set up by anyone with earned income; proceeds can be used for anything. Withdraw contributions without tax or penalty at anytime.
Writing a Check
Check written directly to an educational facility, hospital, nursing facility or doctor. The check cannot be payable to the minor or adult child.
Contribution Limit Up to $65,000 ($130,000 if married) every 5 years; overall maximum is $235,000-$370,000 depending on state (can be used for college tuition, room & board, fees, books and computers). $2,000 annual contribution per child (investment choices may be greater than 529 plan). Sold in denominations of $50$5,000; $5,000 annual max through TreasuryDirect plus another $5,000 if purchased as paper bonds; if redeemed within first 5 years, 3-month interest penalty. $13,000 per year per donee ($26,000 if spouse is also a donor); amounts over $13,000 per year result in a gift tax or reduction in donor’s lifetime exclusion of $5 million (note: each spouse has their own $5 estate/gift exclusion). $5,000 annual limit ($6,000 if age 50+); growth is tax-deferred— tax-free if held for 5+ years and owner is at least 59½.
No dollar limit (e.g., parent or friend writes check for $33,000 to cover child’s first year at college).
Money in a 529 or ESA is considered the beneficiary’s (usually a child) when applying for federal financial aid; this could lower the amount of student aid. The custodian (usually a parent or grandparent) has the flexibility of choosing the beneficiary now or in the future. If money is used for higher education, withdrawals are tax-free. Coverdell ESAs must be used or rolled over to another beneficiary by age 30—no age limit for 529 plan beneficiaries. ESAs typically offer a wider range of investment options. ESA contributions are phased out: AGI of $190,000-$220,000 (joint return) or $95,000-$110,000 (single).
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© 2011 Institute of Business & Finance
Retirement Income 2011 Yield Figures Money market 0.1%
5-year government bond 2.2%
GNMA fund 3.6%
6 month T-bill 0.1%
30-year TIPS 2.2%
Muni bond fund 4.1%
TIPS fund 0.4% + inflation
5-year CD 2.5%
10-year annuity 4.3%
EE Bonds 0.6%
Floating rate fund 2.6%
Multi-sector bond fund 4.4%
Bank savings account 0.6%
High-dividend stock fund 2.9%
High-yield muni fund 4.6%
I Bonds 0% + inflation
5-year annuity 3.2%
30-year government bond 4.7%
Short-term gov’t fund 1.3%
10-year government bond 3.5%
Emerging markets bond fund 5.5%
S&P 500 dividend yield 1.8%
Med-term bond fund 3.5%
H/Y corporate bond fund 5.9%
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When deciding what asset(s) or investment vehicle(s) to use for retirement income, the biggest risk is possible loss; high-yield bonds have a greater yield (5.9%) but principal and yield will fluctuate quite a bit more than a medium-term bond fund (3.5% yield; high-yield had a standard deviation of 12% versus 4% for medium-term bonds). Another important concern is “donative intent.” If the investor has no desire to leave anything to heirs, an immediate annuity (for a single person or married couple) is often the best option—high-yield, zero volatility, tax-advantaged income—but zero value when second spouse or single person dies.
Immediately Annuitize $100,000 [guaranteed lifetime income] Strategy #2: $100,000 immediate annuity (zero balance after 2nd spouse or single person dies)
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annuitize $100,000 for lifetime income (age 65 male)
$7,800 a year until death
annuitize $100,000 for lifetime income (age 65 female)
$7,300 a year until death
annuitize $100,000 for lifetime income (both spouses)
$6,600 a year until death
• With all 3 immediate annuities, 60-64% of each payment is tax free (36-40% is taxable)
Systematic Withdrawal Plan
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If you want to maintain control over principal, a systematic withdrawal plan (SWP) using one or more mutual funds may be the answer. These plans provide complete flexibility: you can change investments, increase, decrease, stop, start, end or modify a SWP at anytime without cost or fee. Monthly income can be sent to you as a check or automatically deposited into a bank account. The table below assumes $100,000 was invested on January 1, 1991 in a balanced (stock/bond) fund and then $8,000 was taken out at the end of each year. This income strategy looks appealing, provided the investor can live with the ups and downs of stocks and bonds. Unlike annuitization, the investor gave up guaranteed income and some tax advantages. In return, account value was always accessible and usually grew—more money that could later be used or given to heirs (as shown below).
Systematic Withdrawal Plan [1991-2010]: $100,000 invested and $8,000 taken out each year Date
Income
Balance
Date
Income
Balance
Date
Income
Balance
1991
$8,000
$111,000
1998
$8,000
$164,000
2005
$8,000
$199,000
1992
$8,000
$112,000
1999
$8,000
$162,000
2006
$8,000
$213,000
1993
$8,000
$116,000
2000
$8,000
$178,000
2007
$8,000
$219,000
1994
$8,000
$109,000
2001
$8,000
$184,000
2008
$8,000
$157,000
1995
$8,000
$128,000
2002
$8,000
$165,000
2009
$8,000
$179,000
1996
$8,000
$136,000
2003
$8,000
$192,000
2010
$8,000
$194,000
1997
$8,000
$156,000
2004
$8,000
$201,000
INSTITUTE of BUSINESS & FINANCE Since 1988
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Growth Stocks and Value Stocks Growth Stocks vs. Value Stocks
Stocks are categorized according to their size (large, mid and small) and valuation (growth or value). Large cap stocks have an average market capitalization (number of outstanding shares multiplied by price per share) of $93 billion, $4 billion in the case of mid caps and $1.3 billion for small cap stocks. Growth stocks have higher than average earnings, sales and/or return on equity; they frequently have a high price-to-earnings (P/E) ratio. For example, at the beginning of 2011, small cap stocks had a P/E of 26, small growth stocks had a P/E of 29 and small value stocks had a P/E of 24.
Stock Market Performance By Decade [1970-2010] 1980s
1990s
2000s
2001-2010*
Large Growth
3%
16%
20%
1%
0.4%
Large Value
12%
20%
14%
5%
3.3%
Mid Growth
6%
15%
16%
5%
3.0%
Mid Value
13%
19%
14%
9%
7.1%
Small Growth
6%
11%
15%
6%
3.7%
Small Value
15%
21%
14%
11%
9.4%
lic at
D up
* mutual fund categories, net of expense ratios
e
1970s
Stock Category
The table above contains 30 performance “boxes;” in all but three instances (shown in boldface type), value outperformed its growth counterpart. Moreover, in all instances, value had less risk (standard deviation) than its growth counterparts. In some cases, the difference was extreme (e.g., in the 2000s, meaning 2000-2009, small cap value had 25% less volatility than small cap growth stocks).
N
ot
Returns for growth and value stocks are usually positive, particularly over a 3- or 5-year period, as shown in the two side-by-side tables below. On an annual basis (1970-2010), growth stocks had positive returns 78% of the time (32 out of 41 years) while value stocks had positive returns 80% of the time (33 out of 41 years).
Category
o
Positive 3-Year Rolling Periods [1970-2010]
Positive 5-Year Rolling Periods [1970-2010]
% Positive
Category
+ Returns
% Positive
31/39 yrs.
79%
Large Growth
31/37 yrs.
84%
Large Value
33/39 yrs.
85%
Large Value
34/37 yrs.
92%
Mid Growth
34/39 yrs.
87%
Mid Growth
29/37 yrs.
78%
Mid Value
37/39 yrs.
95%
Mid Value
34/37 yrs.
92%
Small Growth
33/39 yrs.
85%
Small Growth
32/37 yrs.
86%
Small Value
34/39 yrs.
87%
Small Value
35/37 yrs.
95%
ALL GROWTH
35/39 yrs.
90%
ALL GROWTH
30/37 yrs.
81%
ALL VALUE
36/39 yrs.
92%
ALL VALUE
33/37 yrs.
89%
Large Growth
D
+ Returns
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Certified Fund Specialist® – CFS® Certified Annuity Specialist® – CAS® Certified Estate and Trust Specialist™ – CES™ Certified Income Specialist™ – CIS™ Certified Tax Specialist™ – CTS™ Master of Science in Financial Services – MSFS