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Step 11: Risk Exposure

This wider range or increased volatility has also carried a higher average return. Of the four portfolios shown, the most risky Index Portfolio 100 had the widest range of monthly return outcomes over the 50-year period. This wider range or increased volatility is the trade-off for higher returns, relative to Index Portfolios 25, 50 and 75 that had lower risk and lower returns. The charts also reflect the growth of a $1 investment in each portfolio over the 50-year period. Remember that an investor’s actual returns will vary from these returns due to the timing of withdrawals and contributions, rebalancing strategies, costs, fees, and other factors. As was shown in the previous charts and discussions, diversification among low-cost index funds is a very effective means for investing one’s assets. While one cannot obtain any guarantee of future success based on the past, the 50 or 86 years of data associated with the style-pure index portfolios is arguably, and evidently, as good as it gets for any investor, individual or institutional. The data table in Figure 11-8 represents the short-term and long-term risk and return data for the S&P 500 and 10 index portfolios with varying degrees of exposure to bonds and stocks. Growth of $1 is also shown for each portfolio. When seeking to construct a portfolio, it is advisable for investors to pay careful attention to the 20, 50 and 86-year data columns on the right hand side. The 50-year return is largely considered the historic return and a good estimate of the future or expected return over 15-year or greater periods. The left columns which show the year-to-date, 1, 3 and 5-year returns are shown in

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