This scatter plot measures performance vs. risk by asset class for 15 years, ending December 31, 2023. Returns are listed as follows: Moderate growth and income liquid: 8.3%, Emerging market equities: 6.9%, Developed market ex-U.S. equities: 7.4%, Investment grade fixed income: 2.7%, Commodities: -0.2%, U.S. Large Cap Equities: 14.0%, Hedge Funds: 5.6%, U.S. Small Cap Equities: 11.3%, U.S. Mid Cap Equities: 13.6%, Emerging market fixed income: 5.8%, Developed market ex-U.S. fixed income: -0.1%, High Yield FI: 9.2%. Standard deviations are listed as follows: Moderate growth and income liquid: 9.8%, Emerging market equities: 19.2%, Developed market ex-U.S. equities: 16.8%, Investment grade fixed income: 4.2%, Commodities: 14.9%, U.S. Large Cap Equities: 15.4%, Hedge Funds: 6.1%, U.S. Small Cap Equities: 20.5%, U.S. Mid Cap Equities: 17.5%, Emerging market fixed income: 8.4%, Developed market ex-U.S. fixed income: 8.4%, High Yield FI: 8.4%.
Risks
Risk considerations
Investing in stocks involves risk and their returns and risk levels can vary depending on prevailing market and economic conditions. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Foreign investing has additional risks including currency, transaction, volatility and political and regulatory uncertainty. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High-yield fixed-income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment-grade fixed-income securities. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes and may be subject to the alternative minimum tax, and legislative and regulatory risk. Investing in commodities is not appropriate for all investors and may subject an investment to greater share price volatility than an investment in traditional equity or debt securities.
Alternative investments, such as hedge funds, are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of the U.S. securities laws. They are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. While investors may potentially benefit from the ability of alternative investments to potentially improve the risk-reward profiles of their portfolios, the investments themselves can carry significant risks. Hedge funds trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may, at times, be out of market favor for considerable periods which can result in adverse consequences for the investor.
Definitions
Allocation composition
- Moderate Growth and Income: 2% Bloomberg U.S. Treasury Bills (1–3 Month) Index, 30% Bloomberg U.S. Aggregate Bond Index, 6% Bloomberg U.S. Corporate High Yield Bond Index, 5% JPM EMBI Global Index, 24% S&P 500 Index, 10% Russell Midcap Index, 6% Russell 2000 Index, 8% MSCI EAFE Index, 5% MSCI Emerging Markets Index, 4% Bloomberg Commodity Index.
Index definitions
Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements.Bloomberg U.S. Treasury Bills (1-3M) Index is representative of money markets.
Bloomberg U.S. Aggregate Bond Index is composed of the Bloomberg U.S. Government/Credit Index and the Bloomberg U.S. Mortgage-Backed Securities Index and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities.
Bloomberg U.S. Corporate High Yield Bond Index covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
HFRI Fund Weighted Composite Index is a fund-weighted (equal-weighted) index designed to measure the total returns (net of fees) of the approximately 2,000 hedge funds that comprise the Index.
JPMorgan GBI ex-U.S. Index (Unhedged) in USD is an unmanaged index market representative of the total return performance in U.S. dollars on an unhedged basis of major non-U.S. bond markets.
JPMorgan EMBI Global Index (USD) is a U.S. dollar-denominated, investible, market cap-weighted index representing a broad universe of emerging market sovereign and quasi-sovereign debt.
MSCI EAFE (DM) and MSCI Emerging Markets (EM) indexes are equity indexes which capture large and mid cap representation across DM countries (excluding Canada and the U.S.) and EM countries around the world.
Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000® Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index.
Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
S&P 500 Index is a market capitalization-weighted index composed of 500 stocks generally considered representative of the U.S. stock market.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
The HFRI indexes are based on information self-reported by hedge fund managers that decide, on their own, at any time, whether or not they want to provide, or continue to provide, information to HFR Asset Management, L.L.C. Results for funds that go out of business are included in the index until the date that they cease operations. Therefore, these indexes may not be complete or accurate representations of the hedge fund universe, and may be biased in several ways.
Sources: © 2023 – Morningstar Direct, All Rights Reserved1, and Wells Fargo Investment Institute. Data from January 1, 2009 to December 31, 2023. Performance results for Moderate Growth and Income Liquid are calculated using blended index returns and is for illustrative purposes only. Moderate Growth & Income allocation is dynamic and changes as needed with adjustments to the strategic allocations. Index returns do not represent investment performance or the results of actual trading. Index returns reflect general market results, assume the reinvestment of dividends and other distributions, and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. Unlike most asset class Indexes, HFR Index returns are net of all fees. Because the HFR Indexes are calculated based on information that is voluntarily provided actual returns may be lower than those reported. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Standard deviation is a measure of the volatility of returns. The higher the standard deviation, the greater volatility has been. See “Index Definitions and Asset Class Risk Disclosures” link above for composition of the Portfolios, risks, and definitions of indexes.
Diversification strategies do not guarantee investment returns or eliminate the risk of loss. Indexes represented: U.S. Investment Grade FI = Bloomberg U.S. Aggregate Bond Index. Hedge Funds = HFRI Fund Weighted Index. Emerging Market FI = JP Morgan EMBI Global Index. High Yield FI = Bloomberg U.S. Corporate HY Bond Index. U.S. Mid Cap Equities = Russell Midcap Index. U.S. Small Cap Equities = Russell 2000 Index. Developed Market Ex-U.S. FI = JP Morgan GBI Global Ex U.S. Index. U.S. Large Cap Equities = S&P 500 Index. Developed Market Ex-U.S. Equities = MSCI EAFE Index. Emerging Market Equities = MSCI Emerging Markets Index. Public Real Estate = FTSE EPRA/ NAREIT Developed REITs Index. Commodities = Bloomberg Commodity Index. FI = fixed income. DM = developed market. EM = emerging market.
1. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Key Takeaways
- We believe a diversified allocation can strike a good balance between risk and return.