Reducing the Range of Planning Outcomes

August, 2023

The probability of experiencing positive returns from informed stock investing increases over time.

An allocation to a value-weighted group of US large stocks grew wealth during 75% of the one-year periods between January 1926 and May 2023; however, 25% of those years had negative outcomes. Over ten-year periods, positive outcomes occurred 95% of the time; only 5% were negative. No period exceeding 184 months (just over 15 years) shows a negative return based on US market data, but even that outcome is not assured over any time period.1

Stocks do not become less risky in the long run. The range of potential stock market outcomes over a multi-year period is wide. The year-end value of a dollar invested in a value-weighted group of US large cap stocks over one-year periods between January 1926 and May 2023 has ranged from $0.32 to $2.63. Over a much longer 20-year horizon, the gap between worst- and best-case scenarios ranged from $1.45 to $28.62.1 (See Exhibit 1.) The cumulative difference is more than 2,700 percentage points for the very same asset class!

The huge dispersion possible among US stock outcomes (even pretending that the index funds were always available) means stock investing should not be considered “safe” over any horizon. But equity investors — those with long-term wealth goals and a disciplined approach — can have a much greater confidence of success by employing an informed allocation strategy such as those planned by Professional Financial.

Exhibit 1: Long-Term Performance in US Equities Varies Widely

Historical growth of a dollar outcomes in the S&P 500 lndex, January 1926-May 2023

graph showing Historical growth of a dollar outcomes in the S&P 500 lndex, January 1926  - May 2023

Source:Dimensional Fund Advisors. Past performance, including hypothetical performance, is no guarantee of future results. Growth of $1 computed over rolling monthly periods for the S&P 500 Index assumes reinvestment of income and no transaction costs or taxes. Outcomes are reported for the minimum and maximum of these observations. The analysis is for illustrative purposes only and is not indicative of any investment. S&P data © 2023 S&P Dow Jones Indices LLC. Indices are not available for direct investment.

The Danger of Planning from Cherry-picked Periods

Anyone who’s ever bought a used car is aware what a cherry-picked driving history could mean. Low mileage and regular oil changes matter little if the seller conceals that the car was once submerged in floodwater.

A recent investor focus of concentrating on a few high-performing stocks has become popular. For those more careful, funds focused on variations of S&P 500 large cap stocks are popular. Since 2010, large cap S&P 500 stocks outperformed US small cap value stocks2 by 1.7 percentage points annualized. However, those that find S&P 500 stocks so appealing are almost wholly unaware that a “lost decade” from January 2000 to December 2009 preceded the years since 2010. An index of those same large company stocks showed a negative 0.9% annualized return for ten years — trailing an index of today’s less popular US small value stocks by more than 13 percentage points annually!

More extensive data histories improve our planning perspective. Historically since June 1927, US small cap value stocks have outperformed the S&P large company index by 3 percentage points annually — 13.1% to 10.1%. This is sensible since small cap stocks like Canandaigua Wine are riskier than large cap stocks like Apple or Microsoft. There are many return periods of the S&P 500 with aberrations like the “Lost Decade.” Losing to small cap value stocks over 14 years while returning less than zero during 10 years is an unlikely long-term outcome. But those things happen, and variations are always possible.

Exhibit 2: Using Outliers to Plan Informs Wrong Expectations

Annualized returns for the S&P 500 Index and Dimensional US Small Cap Value Index

bar graph: Annualized returns for the S&P 500 Index and Dimensional US Small Cap Value Index

Source:Dimensional Fund Advisors. Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. S&P data © 2023 S&P Dow Jones Indices LLC.

Concluding Observations

Harry Markowitz’s portfolio theory goes back to the 1950s, for which he was awarded the Nobel prize. The theories of Bill Sharpe and others that followed, were foundational in the development of today’s professional investing process. Capitalizing on Markowitz’s game-changing concept, though vastly improved today, clients have far greater confidence of realizing successful planning outcomes than was possible before the 1970s.

Markowitz’s theory profoundly shifted investor thinking from routinely making “bets” picking individual stocks or funds to assessing risk/return holistically and managing long-term strategies. For example, small cap stocks can have higher volatility than individual large cap stocks. Yet when both small cap stocks and large cap stocks are allocated as cap-weighted portfolios in a sensible manner, the increased diversification benefits of the combined portfolios, meaningfully reduces standard measures of portfolio volatility for both.

Rather than concentrate on savoring a single raw flavor, a great chef evaluates an ingredient’s contribution to the entire dish. He understands that the whole is greater than the sum of its parts. Successful investment management practiced here at Professional Financial does much the same thing.


1. Growth of wealth computed over rolling monthly periods (1 year, 5 years, 10 years, 15 years, 20 years) for the S&P 500 Index. Percentages stated indicate periods with a positive gain. Dollar amounts are the lowest and highest historical results within each time range.

2. US small cap value stocks represented by the Dimensional US Small Cap Value Index. The index is defined as companies whose relative price is in the bottom 35% of the Dimensional US Small Cap Index (a market-capitalization-weighted index of securities of US companies whose market capitalization falls in the lowest 8% of the total market capitalization of the eligible market) after the exclusion of utilities, companies lacking financial data, and companies with negative relative price. The eligible market is securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market. Exclusions: non-US companies, REITs, UITs, investment companies, and companies with the lowest profitability within the small cap value universe. The index excludes companies with the highest asset growth within the small cap universe. Profitability is defined as operating income before depreciation and amortization minus interest expense divided by book equity. Asset growth is defined as change in total assets from the prior fiscal year to current fiscal year. Data source: CRSP and Compustat.

The Dimensional US Small Cap Value Index has been retrospectively calculated by Dimensional Fund Advisors LP and did not exist prior to the index inception date. Accordingly, results shown during the periods prior to the index inception date do not represent actual returns of the index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.