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In a past article, Investment Returns for 2010, I reviewed the 2010 returns for various asset classes using Vanguard mutual funds. A useful way of summarizing the results is to use the nine-box style matrices.

Stock Funds
The nine-box matrix for stocks breaks the stock market down by size and valuation. The size of a firm could be determined using various measures like gross sales or number of employees. But in finance size is normally in terms of market capitalization (market cap), which is the market value of the company on the stock market. Market cap is stock price times the number of outstanding shares.

Likewise, there are several alternative measures of a companies valuation, e.g. PE-Ratio or Dividend Yield. Most valuation measures form a ratio of the stock price to some fundamental value like dividends per share, earnings per share, or book value per share. In the style box system, valuation is the company’s stock-price-to-book-value.

Generally, stocks of small companies are riskier than stocks of larger companies. Value stocks are more of a bargain with lower P/E ratios and higher dividend yields than growth stocks. Value stocks often pay a good dividend while growth stocks often pay little or no dividend. Many investors consider value stocks to be less risky than growth stocks.

In 2010, it is clear that small-cap stocks beat large-cap stocks by a wide margin. This was true for value, blend and growth stocks. So the risky bet on small companies paid off.

And generally in 2010, growth stocks edged out value stocks. This was true for large-cap, mid-cap and small-cap stocks. Betting on the high flying growth stocks was a winning bet.

Vanguard Funds by Style Box

Bond Funds
The nine-box bond matrix breaks the bond market down by maturity and credit rating. Long-term bonds are riskier than short-term bonds. Lower-rated bonds, say BBB, are riskier than higher rated bonds like AAA Treasuries.

In 2010, investors were rewarded for extending maturities and also for taking on credit risk.

Summary
In 2010, investors were rewarded for taking on riskier assets. Stocks beat bonds. Riskier stocks beat less-risky stocks. Riskier bonds beat safer bonds. It was risk all the way.