Cost Segregation

Posted on May 13, 2008
Filed Under Personal Finances |

By Selwyn Gerber:

“Elephants don’t gallop, horses do: Stock prices of large companies with big capitalizations move up and down slowly relative to smaller companies because there is less market ignorance and uncertainty on big companies to profit from. Smaller companies are inherently more risky. Over time buying smaller companies therefore tends to be far more rewarding. Risk and reward are generally two sides of the same coin.”
- Rip Van Winkle Wisdom

cost segregation studies

Small cap stocks deliver greater returns than large caps over time. Although they carry greater risk than large cap companies, investors are well rewarded for their investments in small cap stocks.

cost segregation study sample

The different rates of return are even greater when growth and value investing methodologies are factored into the analysis. There are two general investment styles, value and growth, that dominate the mutual fund industry and account for a large part of stock market trading. Value investors look for stocks that they believe are trading for less than their intrinsic values. Typically, value investors select stocks with lower than average price-to-book or price-to-earnings ratios and/or high dividend yields. Growth investors try to find stocks that they think will enjoy a strong future. They usually define a growth stock as a company whose earnings are expected to grow at a fast rate compared to its industry or compared to the market as a whole.

http://www.revver.com/video/741382/cost-segregation-plus-attention-property-owners-make-cash-from-your-buildings-with-cost-seg-plus/
http://www.revver.com/video/741387/attention-property-owners-make-cash-from-your-buildings-with-cost-seg-plus/

While there is less data available, the evidence is clear. Small cap value outperforms large cap value and both outperform growth strategies.

Small cap value outperforms all other groupings by a wide margin. Value stocks tend to be underpriced when compared to the overall stock market.

For most investors, the U.S. stock market represents the first equity asset class in a diversified portfolio. Sometimes it represents the only equity exposure for an individual investor. Individuals can do better by adding international markets to their portfolio. Consistent with the idea that small caps do better, European, Asian, and developing markets are all smaller than the U.S. market. In Figure 8-3, we see that these markets offer a large investment opportunity.

More than half of the world’s stock market capitalization lies outside the U.S. China and India, although growing fast, have economies that are insignificant when compared with the developed nations.

Global stock market exposure allows investors to participate in the success of some of the best known companies. Many household names are actually companies from outside the U.S. (Table 8-1), companies that prudent investors should own.

Global companies which produce many of the best known products are a required part of a well-diversified portfolio.

The data supports the idea that these smaller markets do better than the larger cap U.S. market over time. In Figure 8-4, we see that over 19 years, these emerging markets nearly doubled the investment returns available from the large cap indexes of the U.S. market.

Emerging markets offer greater returns and greater risks to U.S. investors. Again we see that investors willing and able to bear risk are usually amply rewarded over time.

Developed markets may also offer better returns than the U.S. market. Table 8-2 illustrates this concept with the recent history. The advantage of adding global investments to your portfolio is that by introducing non-correlated risk, we can reduce the overall portfolio volatility. by taking advantage of opportunities abroad, you may experience higher returns than if you invested solely in the U.S. market. In any given year, it is impossible to predict which market will be the top performer, so it is important to take a diversified approach. The risks of global investing, just like the returns, are generally non-correlated with the U.S. market. There are unique risks, like currency fluctuations, foreign taxation, global economic and political risks, and differences in accounting and financial standards, associated with investing in foreign markets.

Cost Segregation

Comments

Leave a Comment

Categories

Recently

Admin