NEED FOR PORTFOILO

WEALTH INDICES OF INVESTMENTS

IN THE US CAPITAL MARKETS
(YEAR-END 1925 =$ 1.00)

INFLATION-CUMMULATIVE INDEX

INFLATION-RATES OF CHANGE

U.S. TREASURY BILLS- RETURN

INDEX

U.S. TREASURY BILLS-RETURNS

TREASURY BILLS
Stability of principal value is the great virtue of
T-bills. But the price paid for this advantage is
the rate of return that is only marginally ahead
of inflation
The compound annual return from T-bills over
the 80-year period was 3.7% compared with
compound annual inflation of 3% over the
same period
What if the returns are adjusted for tax rate
Does it mean that T-bills are not worth
investing? Beware of money illusion while
investing in short term instruments

TREASURY BILLS
Period

Rate of
return
(average
annual)

Marginal
tax rate

Average
Inflation
rate

Effective
return

1979-1981

12.1%

30%

11.5

-3.5%

1982-1984

9.7%

30%

3.9

3.0%

Which one is better? Be watchful of money illusion!

Short-term instruments may erode your wealth

TREASURY BILLS
Inflation may erode the purchasing power of
your money invested in short term instruments.
Example:
A widow aged 54 with 30-years of life
expectancy invests her money in 4% CD
interest rate. The amount available for
investment is Rs. 2500,000 With an average
inflation of 3% during the period how much her
wealth grow to at the end of the period if she
consumes the entire yearly interest income?

INFLATION RISK

LONG-TERM GOVERNMENT BONDS:

RETURN INDICES

LONG-TERM GOVERNMENT BONDS:

RETURNS

LONG-TERM GOVERNMENT BONDS:

YIELDS

COMPARATIVE BOND
PERFORMANCE

INTERMEDIATE TERM GOVT.

BONDS: RETURN INDICES

INTERMEDIATE TERM GOVT.

BONDS: RETURNS

INTERMEDIATE TERM GOVT.

BONDS: YIELDS

LONG-TERM CORPORATE BONDS:

RETURN INDEX

LONG-TERM CORPORATE BONDS:

RETURN INDEX

LARGE COMPANY STOCKS

LARGE COMPANY STOCKS

LARGE COMPANY STOCKS

SMALL COMPANY STOCKS

SMALL COMPANY STOCKS

CONSOLIDATED RESULTS (19262005)

EQUITY RISK PREMIUM

COMPARATIVE RETURNS

COMPARATIVE RETURNS

WHY PORTFOLIO

Let every man divide his money

into three parts, and invest a
third in land, a third in business,
and a third let him keep in
reserve
- Talmud (c. 1200 BC-500
AD)

BEAR MARKET PERFORMANCE

(MARCH 24, 2000-OCTOBER 9, 2002)
ASSET CLASS

CUMULATIVE TOTAL
RETURN *

U.S. Bonds (taxable, high quality, Intermediate

term)

+29%

U.S. Stocks (large company)

-47%

Real Estate Securities (REITs)

+34%

ASSET ALLOCATION STRATEGY

/3 U.S. Bonds

-22% **

/3 U.S. Stocks

TALMUD STRATEGY
/3 U.S. Bonds

/3 U.S. Stocks

+5% **

/3 Real Estate Securities

*With full reinvestment of income. Rounded off to nearest percent.

** Buy and hold performance without periodic rebalancing. Rounded off to nearest

PORTFOLIO
One third allocated to fixed income
mitigates the volatility risk inherent in
two-thirds allocated to equity
investments.
Diversification across equity asset classes
with dissimilar patterns of returns mitigate
downside risk without resorting to
diversification into asset classes with
lower expected returns
Multiple-asset-class investing is a smart
strategy