Safety Zones, Danger Zones, and the Critical Path: Visualizing U.S. Asset Class Returns Based on Time Horizons, Size, and Style

Abstract

Many advisors struggle to get clients to focus on long-term investing and ignore the constant short-term noise spewed by the media. This paper provides a series of easily understood tables and figures that should help clients realize why financial advisors must use appropriate time horizons when formulating lifetime financial plans. It also explores the intuitive nature of dedicated portfolios for retirement, and the critical path that splits the future into “safe zones” and “danger zones.”

The images use the same style box and color scheme that Morningstar uses for its Market Barometer. They are backed up technically with regression analyses to demonstrate that time horizons as well as size and value-growth dimensions are statistically significant in explaining return rates. The same is true for the probabilities of earning selected returns, such as chances of earning 10 percent or more over various time horizons. This paper also challenges what we believe are incorrect interpretations of volatility as risk in modern portfolio theory (MPT).

Keywords: Asset Class Returns, Time Horizons, Lifetime Financial Plans, Retirement Planning

JEL Classification: G10, G11