of U. S. Cash
of U. S. Cash
in U. S. Cash
10- Year Annualized
Growth of $10,000
(U.S. cash returns
(U.S. bond returns
Difference Between Worst-Case
and Best-Case Cash Performance
*U.S. cash has an 8.33% allocation in the author’s 7 Twelve portfolio. All 12 assets were rebalanced annually
over the 10-year period.
Source: Morningstar Principia, author calculations
annualized return of 1.61%. The overall
return of the 12-asset portfolio dropped
to 8.91% from 8.93%, a decline of 2 basis
points. The standard deviation of the 12-
asset portfolio was unchanged.
What this tells us: The most recent
10-year period (2002-11) has been one
of the worst for cash on record, inasmuch as the actual portfolio performance and the Worst-Case Cash performance are so similar.
Finally, as shown in the Best-Case Cash
chart on the proceeding page, consider
the returns of the best 10-year period
for U.S. cash, which happens to be the
period from 1978 to 1987. During this 10-
year period, cash generated an impressive annualized return of 9.81%.
The impact of superior cash returns
on the portfolio was beneficial, of
course, with the 10-year return of the 12-
asset portfolio increasing to 9.60%. The
10-year standard deviation of 15.34%,
however, is essentially unchanged from
the Actual Cash Return Portfolio and
Worst-Case Cash Portfolio.
A summary of the scenarios — based
on actual cash performance, worst-case cash performance and best-case
cash performance — is provided in the
Cash Summary chart above.
UNDERSTANDING THE PA YOFF
For investors that place all their investments in one asset, such as bonds or
stocks or real estate or cash, timing is
everything. The difference between
the worst-case 10-year time period and
best-case 10-year time period for a 100%
U.S. cash portfolio was 820 basis points
— resulting in a performance differential
of $13,757 within a diversified portfolio
that had a starting balance of $10,000.
For an investor using a diversified
approach (in this analysis, a 12-asset
portfolio), the performance differential at the portfolio level between the
worst-case cash returns and the best-case cash returns was 69 basis points,
or $1,531 in ending account value.
Are 69 basis points a compel-
ling differential? Maybe so, but only
because we could identify the worst-
case cash returns and best-case cash
returns after the fact. Going forward,
obviously, we don’t have that luxury.
Completely avoiding any asset class
in a diversified portfolio amounts to a
guess that a particular asset class will
underperform and that another asset
class will outperform.
Craig L. Israelsen, Ph.D., is a Financial
Planning contributing writer in Spring-ville, Utah, and an associate professor
at Brighham Young University. He is
the author of 7Twelve: A Diversified Investment Portfolio With a Plan.
go to financial-planning.com
to take the ce Quiz online
December 2012 Financial Planning 91