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Volume 19, August 2012

Investors worldwide continue to

A Study of Real Real Returns
grapple with the lingering effects of
the deepest economic downturn Investors often focus on nominal return — or the return they see quoted in the
since the Great Depression. The paper or on a financial news site — on a given investment. Unfortunately, there are
U.S. unemployment rate remains
stubbornly high, China is attempting several factors that often stand between a nominal-return figure and the building
to avoid a hard economic landing, of real wealth. Sophisticated investors frequently refer to the real return, which
and Europe is trying to manage its is a nominal return adjusted to take inflation into account. At Thornburg, we
way through a sovereign debt crisis.
take that analysis a few steps further and adjust stated performance numbers for
In an effort to stimulate growth and
avoid a Japanese-style, decades-long
additional factors — taxes and investment expenses among them. We believe that
economic malaise, the U.S. Federal investors should be attentive to this return figure, the number that’s left after
Reserve has indicated a willingness accounting for inflation, taxes, and investment expenses.
to keep a highly accommodative
monetary policy in place through at
least 2014 by keeping short-term
interest rates near zero. Growth of a Hypothetical $100
Some are beginning to question the S&P 500 Index from December 31, 1981 to December 31, 2011
long-term effects of this approach,
as inflation often follows loose
Nominal Return
monetary policies, and once the Nominal
inflation genie is out of the bottle, it $2,500 Expenses Return:
can be difficult to contain. In 2011, 10.98%
Dividend Taxes $2,275
Kansas City Federal Reserve Bank
President Thomas Hoenig (since Capital Gains Taxes After
retired) warned that “extended Expenses:
$2,000 Inflation 10.43%
periods of accommodative policies $1,959
are almost always followed by some Real Real Return
combination of ballooning asset After
Dividend
prices and increasing inflation.” In
Taxes:
early 2012, current St. Louis Federal $1,500 9.29%
Reserve President James Bullard $1,436
was quoted in a speech as saying
After
that “it may be especially difficult Capital
to remove policy accommodation Gains Taxes:
at the appropriate pace and at the $1,000 8.92%
appropriate time.” $1,297

Inflation is not currently a front-

burner issue for most investors.
However, over the long term, Real Real
$500
inflation and taxes have been the Return
After
investor’s two primary obstacles to Inflation:
building long-term wealth. Explicit 5.78%
tax rates are currently the subject $540
of much debate; however, inflation $0
is often referred to as a “silent” tax, 1981 1986 1991 1996 2001 2006 2011
as it has been used by governments
for centuries to relieve themselves
of high debt burdens by printing
new dollars that are worth less than We call it real real returns.
the dollars they borrowed. An understanding of just how real real returns work can help us choose invest-
It’s important for investors to look ments, allocate assets between different vehicles, and lay the foundation for
beyond nominal returns to what an
investment returns after inflation,
building real wealth.
taxes, and expenses —
the Real Real Return. Results reflect past performance and do not guarantee future results. The performance of an index is not indicative of any particular investment. Investors
may not make direct investments into any index. Sources are provided at the end of this study.
Obstacles to Investing Success Vary Ordinary Income Taxes
Asset class returns can vary dramatically from year to year. Some sources of investment income — primarily interest
Indeed, most investors have been subjected to a roller-coaster income from corporate and U.S. government bonds — are
ride over the past decade, and most tend to see the negative subject to taxation at ordinary income tax rates. Over the past
and unpredictable effects of that variation as the primary 30 years, the highest marginal tax rates have ranged from 28%
threat to success. But the factors that detract from nominal to 50%. In prior periods, the highest marginal rate reached
investment returns — the returns we often see quoted — also as high as 70%. Clearly, higher marginal tax rates impact the
fluctuate, though over longer time periods. These factors can amount of interest income one retains.
pose an equally insidious threat to success. While investment
expenses have trended downward recently, taxes and inflation The interest income from municipal bonds is generally not
remain primary obstacles to building real wealth. subject to ordinary income taxes.

In calculating the real real returns you see portrayed in this

Inflation, The Investor’s Old Bugaboo study, we apply the highest ordinary income tax rate in place at
the time the income was generated and we assume that taxes
Inflation is the rate at which prices for goods and services rise.
are paid from income received.
As it increases, the relative purchasing power of a dollar — and
hence one’s investment portfolio — falls. Reduced purchasing
power can be particularly acute for retirees who strive to Dividend Income Taxes
balance principal protection with the need to pay mortgages,
For many years, interest income from taxable bonds and
utility bills, medical expenses, and more.
dividend income from equities were taxed at the same rate.
Inflation rates fluctuate dramatically over time. The rates Legislation signed in 2003 changed the rules so that the
reported by the government have been benign in recent years, maximum rate on certain types of dividend income is now 15%.
but there have been periods — during This legislation could expire soon,
the years 1974 and 1980, for example and the tax rate on dividend income
— when the annual rate exceeded 12%.
Investors often focus on could increase in coming years. For
Even without these extraordinary nominal returns, or the purposes of this study, we apply the
intervals, inflation has averaged highest dividend tax rate in effect at
almost 3% over the past 30 years. return they see quoted on an the time of the investment.
With a nominal investment return of
6%, that 3% reduces the real return
investment. Unfortunately,
Capital Gains Taxes
to a mere 3%. there are often factors that
The third type of tax applies to capi-
Monetary policy can affect inflation diminish nominal returns tal gains — the difference between
levels. The U.S. Federal Reserve (the the price paid for an investment and
Fed) operates under dual mandates and affect the building of the higher price at which it was sold.
to promote price stability and foster real wealth. Only when As with other tax types, these rates
maximum employment. These objec- vary over time. Individuals pay capi-
tives are often somewhat at odds with investors take those factors tal gains taxes at ordinary income
one another, and the Fed attempts to tax rates for gains on investments
strike a reasonable balance. Since the into account do they arrive at held less than 12 months. In 2003,
most recent financial crisis took hold the real real return. the capital gains rate paid on secu-
in 2008, the Federal Reserve has rities held longer than 12 months
maintained an accommodative and was lowered from 20% to 15%. This
expansive policy posture, keeping both short- and long-term legislation could expire soon as well. For the purposes of
interest rates low in an effort to promote growth. Prolonged calculating the real real returns portrayed here, we assume
periods of accommodative monetary policy have, in the past, investments are held for more than one year, and apply the
been followed by periods of higher inflation. It remains to be 15% rate at the time of sale.
seen whether this round of accommodative policy will result
in greater inflation in the coming years. If it does, it will be a
more significant factor in the computation of real real returns. Investment Expenses
Investors pay fees and expenses, which also diminish nominal
return. Expenses have, broadly speaking, come down over
Taxes on Investments time. But the rate of decline may slow in coming years. For
Tax rates vary over time too, of course. This election year, the purposes of this study, we apply a rate of 0.50%, with the
ordinary income tax rates are the subject of acrimonious exception of the real estate investments. As homeowners know,
debate. However, investors are subject to a variety of taxes on though, home maintenance can exceed many thousands of
investments, based on the type of returns received. dollars per year. In practice, these costs reduce returns on
real estate. For such investments held for more than a year, we
apply a typical 6% commission to proceeds received.

2
 Erosion of Total Returns Over 30 Years (In a Taxable Account, as of 12/31/2011)
Real Real Nominal
Return Return

U.S. Large-Cap Stocks

5.78% 10.98%
(S&P 500 Index)

U.S. Small-Cap Stocks

(Russell 2000 Index) 5.03% 9.81%

Municipal Bonds
(Barclays Muni Index) 4.80% 8.49%

International Stocks
(MSCI EAFE Index) 4.43% 9.28%

Long-Term Gov Bonds

(20-yr Treasuries) 4.11% 11.03%

Corporate Bonds
(Barclays U.S. Corporate Index) 2.64% 9.70%

Intermediate Gov Bonds

(5-yr Treasuries) 2.18% 8.51%

Real Estate/Single Family

(Winans Int’l Real Estate Index) 0.38% 3.94%

T-Bills -0.71% 4.65%

Commodities
-2.56% 0.98%
(Dow Jones–AIG Commodity Index)

-4% -2% 0% 2% 4% 6% 8% 10% 12%

30-Year Average Annual Returns

Real Real Return Capital Gains Taxes Dividend/Interest Income Taxes Expenses Inflation

Real Real Returns

U.S. Large U.S. Small Municipal Int’l Long-Term Corporate Int. Real
Cap Stocks Cap Stocks Bonds Stocks Gov Bonds Bonds Gov Bonds Estate* T-Bills Commodities Inflation

30 Years 5.78% 5.03% 4.80% 4.43% 4.11% 2.64% 2.18% 0.38% -0.71% -2.56% 2.96%

20 Years 3.64% 4.38% 2.89% 1.03% 3.28% 1.29% 1.33% -0.11% -1.03% -1.01% 2.49%

15 Years 1.74% 2.44% 2.60% 0.18% 3.53% 1.20% 1.66% -0.28% -1.12% -2.04% 2.38%

10 Years -0.50% 1.86% 2.30% 1.34% 3.80% 1.09% 1.44% -1.57% -1.78% 0.97% 2.48%

5 Years -3.26% -2.76% 2.38% -7.30% 5.74% 1.78% 3.20% -5.83% -1.89% -5.92% 2.26%

1 Years -1.63% -7.57% 6.15% -15.09% 18.55% 2.19% 4.03% -10.57% -3.33% -16.28% 2.96%

Methodology: The chart at the top of the page shows how fees, taxes on dividends and capital gains, and inflation erode real wealth. The amount at the far right shows the nominal return of an invest-
ment, while the area in gold ­reflects the amount eaten away by fees (in our example, fees of 50 basis points (0.50%) were applied to the investment, with the exception of real estate, which includes a
one-time 6% commission). The impact of taxes on income from the investment (either dividend or interest income) are represented by the area in teal. Taxes on capital gains provide a further drag on
performance and are represented by the area in green, while the silent tax of inflation, in burgundy, can often turn a positive nominal return into a negative real real return. Sources and descriptions of each
index and asset class are provided at the end of this study.
* For the one-year real real return, the 6% real estate commission was not deducted.

3
A Recap of 2011 been a factor — but not the only one. Interestingly, long-term
government bonds have provided the highest nominal returns
2011 was characterized by a continuation of the heightened
of all the asset classes examined in our study. Why? As U.S.
volatility that investors have endured in recent years. Equity
Treasuries continued their decades-long rally and yields fell
investors experienced the effects of the sovereign debt crisis in
to historic lows, Treasury prices climbed appreciably, adding
Europe, the fears over a hard landing in China, the effects of
to their total return. But with rates now near zero and with
the Japanese earthquake, tsunami, and nuclear disaster, and
little rally room left, this performance is extremely unlikely
Standard & Poor’s downgrade of the United States’ sovereign
to be repeated in the near future.
credit rating. Investments with perceived risk struggled. In
spite of the downgrade, U.S. Treasuries rallied strongly and The source and taxation of income also play a significant role
yields plummeted. in stocks’ first-place finish. Remember that the majority of
the return from most equities comes in the form of capital
gains and that capital gains taxes are deferred until sale. Over
What Are The Results of our Real Real Returns
long time periods, the deferment of taxes on investments is
Calculations? a powerful tool. And remember that once gains are realized
Despite a range of investment outcomes in 2011, the long-term under the current tax code, they are taxed at a relatively low
results of our study remain relatively unchanged. Over the 15% rate. Another contributor: equity dividend income also
past 30 years, common stocks and municipal bonds posted receives favorable tax treatment.
the strongest results (when held in taxable accounts) after we
adjust for inflation, taxes, and expenses as described on page Bonds, on the other hand, receive the majority of returns
two. Taxable bonds have delivered positive results in shorter from coupon payments, which, in the case of corporate and
periods and strong returns in tax-advantaged accounts over government bonds, are taxed at higher ordinary income rates.
longer time frames. This is why long-term government bonds placed highest in
nominal-return terms, but fell well behind equities after taxes
Why have equities provided the highest real real returns over were taken into account.
the past 30 years? Their relatively strong nominal returns have

Tax-Deferred Account vs. Taxable Account: Real Real Returns

7%
Tax-Deferred Account
30-Year Average Annual Real Real Returns as of 12/31/2011

Taxable Account
6% 5.77% 5.72% 5.78%

5.03%
5%
4.50% 4.60%
4.43%
4.11% 4.10%
4%
3.37%

3%
2.64%

2.18%
2%

1%

0%
Intermediate Corporate Long-Term International U.S. Small- U.S. Large-
Gov Bonds Bonds Gov Bonds Stocks Cap Stocks Cap Stocks
(5-yr Treasuries) (Barclays U.S. (20-yr Treasuries) (MSCI EAFE (Russell (S&P 500 Index)
Corporate Index) Index) 2000 Index)

Methodology: The chart above shows how the real real return of investments can shift when held in a tax-deferred account. In the tax-deferred account, taxes are deferred until the end of the 30-year
period. Sources and descriptions of each index and asset class are provided at the end of this study.

4
The Importance of Planning Let’s look at taxable bonds vs. domestic large-cap equities. In
a traditional taxable bond account, interest income is taxed
It’s clear that an examination of real real returns reveals a
at ordinary income tax rates in the year it is received. In our
complex picture and emphasizes the need to focus on taxes,
study, we assume that the taxes came out of the account each
investment vehicles, and taking a holistic approach to plan-
year, reducing the amount available for reinvestment. In
ning instead of making asset class decisions in isolation.
an IRA or employer-sponsored retirement account, though,
Decisions made in isolation, in “silo”
these taxes are deferred until the
form, can result in lower real real
individual receives distributions
returns.
Over the long term, from the account, at which point
Taxable and municipal bonds illus- they are taxed as ordinary income.
trate the need for a more careful common stocks have Paying taxes at the time the income
planning approach. Despite having is received versus deferring taxes
the strongest nominal returns over
consistently generated the over 30 years can have a significant
the past 30 years (again, unlikely to highest real real returns. impact on compounding results. To
be repeated), long-term government wit: over the past 30 years, long-
bonds actually trailed municipal While bonds have recently term government bonds generated
bonds on a real real returns basis. a real real return of 4.11% in a tax-
Municipal bonds generally offer
outperformed stocks by able account vs. a real real return
lower nominal coupon levels than a wide margin, this is of 5.77% in a tax-deferred account.
bonds issued by either the federal gov- The effect of an additional 1.66%
ernment or by corporations, but the unlikely to be repeated in annually over a 30-year period can
interest on municipals is generally be critical to investment success or
exempt from most taxes. For inves-
the future. failure. Clearly, it’s not just the asset
tors in higher tax brackets, this most class that matters; where it’s housed
often results in significantly higher is also important.
after-tax yields for municipal bonds. (Again, in this study we
Most equities receive the majority of their returns from capital
assume taxes were paid in the year income was received, and
gains, but the effect the account type has on real real returns
apply the highest rate at the time). Clearly, losing a small
is similar. If gains are deferred until sale, they are taxed at
amount to taxes every year can have an appreciable impact on
the relatively favorable 15% rate for a taxable account. If held
long-term returns.
in an employer-sponsored plan, withdrawals are taxed as
retirement plan distributions at ordinary income rates. The
Taxable-Equivalent Yield real real return over the past 30 years for large-cap equities (as
represented by the S&P 500 Index) is 5.78% in a fully taxable
When deciding between taxable and municipal bonds, inves-
account versus 5.72% in a tax-advantaged account. Again,
tors should understand the concept of taxable-equivalent yield.
account type matters and planning is key.
This highlights what a taxable bond would have to yield to
equal the tax-free yield of an equivalent municipal bond. The
formula for calculating taxable-equivalent yield is [Tax-free
yield/(1 minus your federal tax bracket)]. For purposes of this What Investors Can Do
study, we calculated real real returns based on the highest
income tax rate at the time. Of course, this is not the rate paid
by all investors. Taxable corporate or government bonds may 1. Determine how individual circumstances can impact your
make more sense for those in lower tax brackets. So, simply real real return
taking a quick moment to calculate taxable-equivalent yield Tax rates vary across the income scale. While munici-
is an important first step in selecting an appropriate asset pal bonds may make more sense for someone in a higher
allocation. tax bracket, taxable bonds, with their higher coupons,
may make more sense for someone in a lower tax bracket.
Investors should review their circumstances and attempt to
Account Type is Important make the most informed choices about which asset classes
Another useful exercise is examining the merits of the dif- make the most sense.
ferent savings vehicles available to maximize tax efficiency.
Many investors have access to multiple ways to save, including 2. Take a holistic approach to asset allocation
traditional investment vehicles and tax-advantaged retirement Real real returns may not be maximized by applying a
accounts — including IRAs and 401(k)s. Unfortunately, inves- single asset allocation across every investment vehicle. A
tors often develop a single asset allocation strategy and apply it growing body of evidence shows that a holistic approach —
across all investment vehicles, where a more tailored approach dividing assets among vehicles to maximize tax efficiency
may help maximize tax efficiency. — can have a material impact on financial well-being.

5
 Much attention, for example, is being paid to the debate
3. Build a diversified portfolio of common-sense investments
in Washington over how to balance the national budget.
with a history of generating positive real real returns
If marginal tax rates were to rise, that could impact the
The past 10, 20, and 30 years highlight the need for well-
attractiveness of one investment vehicle over another.
diversified portfolios. Over the past 30 years, common
Likewise, changes to either dividend and capital gains
stocks, as represented by the S&P 500 Index, delivered
rates could significantly affect the difference between
the highest real real returns in our study. However, that
nominal and real real returns. And any changes made
same asset class delivered negative real real returns over
could impact the relative attractiveness of taxable versus
the past 10 years.
tax-deferred savings vehicles.
As discussed, U.S. Treasuries outperformed stocks over
Aside from the public debates about taxes, certain agen-
the past 30 years on a nominal basis, and their recent
cies and departments of the federal government make
performance has been very strong. But yields are now so
implicit decisions that could impact your ability to generate
low that it is likely not possible for this performance to be
real wealth. The Federal Reserve, charged with balanc-
repeated in the near future. What was a flight to safety
ing strong employment with low rates of inflation, has
on the part of many institutional investors may also have
attempted to stimulate growth. Will higher inflation be
been a flight to greater risk, and investors should plan and
a long-term effect of these efforts? The national debt has
work carefully to develop an asset allocation that takes this
risen dramatically over past decades. The so-called silent
into account.
tax of inflation may be levied when we pay our bills with
newly printed dollars that are worth less than those the
4. Monitor the explicit and implicit effects of government government borrowed. Fiscal and monetary authorities
policy and its impact on investors’ real real returns can both have a significant impact on an investors’ ability
It’s important for investors to monitor both the explicit and to build a portfolio that focuses on real real returns and
implicit policy choices of the federal and state governments. outpaces inflation, taxes, and expenses.

A Picture of Inflation
$250,000

25 Yrs: $207,354
$200,000

$150,000

2011: $100,000

$100,000

No Real Gain –
this amount is
The United States goes off needed just to stay
$50,000 the gold standard in 1971
even with inflation
1925: $7,943

$0

1925 1935 1945 1955 1965 1975 1985 1995 2005 2015 2025 2035
The gold area in the graph shows the equivalent of $100,000 in 2011 dollars, based on CPI for each year. So, $7,943 in 1925 had the same purchasing power
as $100,000 in 2011. The blue area shows nominal amounts representing no real gain on $100,000 starting in 2012 with inflation averaging 2.96%, which
is its 30-yr average rate.

Source: Calculated by Thornburg Investment Management using data presented in the Ibbotson SBBI® 2011 Yearbook, ©2012. All rights reserved. Used with permission.

6
Important Information indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap
universe.
This information should not be considered tax advice. Any
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity
tax statements contained herein are not intended to be used,
universe. The unmanaged index is a subset of the Russell 3000® Index representing approximately
and cannot be used, for the purpose of avoiding tax penalties. 10% of the total market capitalization of that index. It includes approximately 2000 of the
Please consult your independent tax advisor as to any tax, smallest securities based on a combination of their market cap and current index membership.
accounting, or legal statements made herein. Small-cap stocks are subject to greater volatility than large-cap stocks.
The MSCI EAFE (Europe, Australasia, Far East) Index is an unmanaged index. It is a generally
Statements contained herein are based upon information accepted benchmark for major overseas markets. Index weightings represent the relative capitaliza-
furnished to us from independent sources. While we do not tions of the major overseas developed markets on a U.S. dollar adjusted basis. The index is calculated
guarantee their correctness, we believe them to be reliable and with net dividends reinvested in U.S. dollars. There are special risks associated with international
investing, including currency fluctuations, government regulation, political developments, and dif-
have ourselves relied upon them. ferences in liquidity.
The Consumer Price Index (CPI) measures prices of a fixed basket of goods bought by a typical Compared to the other investments in this study, single-family homes are relatively illiquid. Property
consumer, including food, transportation, shelter, utilities, clothing, medical care, entertainment, values can fluctuate and there are no guarantees. Gains on the sale of a property may be taxable
and other items. The CPI, published by the Bureau of Labor Statistics in the Department of Labor, at the federal, state, or local level. Real estate data in this study uses the Winans International
is based at 100 in 1982 and is released monthly. It is widely used as a cost-of-living benchmark Real Estate Index,TM which tracks the prices of new home prices in the United States with Census
to adjust Social Security payments and other payment schedules, union contracts, and tax brackets. Bureau data.
CPI is also known as the cost-of-living index.
A commodity is a physical good – such as food, grain, oil, natural gas, and metals – which is
interchangeable with another product of the same type, and which investors buy or sell in an
Sources active market, usually through futures contracts. If you buy a futures contract, you are basically
agreeing to buy something that a seller has not yet produced for a set price on a specific future
Real real returns were calculated by Thornburg Investment Management using data obtained from date. The futures market is extremely liquid, risky, and complex. Commodity prices can be affected
the following sources: by uncertainties such as weather and war and there are no guarantees against losses. In this
study, commodities are represented by the Dow Jones-AIG Commodity Index (DJ-AIGCI),® from
Inflation/Consumer Price Index–Urban (CPI-U) and Treasuries data were obtained from the Ibbotson 1990 to present. Prior to that, returns are represented by the Dow Jones Futures Price Index. The
SBBI Classic Yearbook, © 2012. All rights reserved. Used with permission. DJ-AIGCI is designed to be a highly liquid and diversified benchmark for commodities traded on
U.S. exchanges. For purposes of this study, it is assumed that commodity exposure is obtained
Commodity and real estate data were obtained from Global Financial Data.
through a vehicle tracking the index and not by purchasing the underlying futures contracts.
Corporate and municipal bond data were obtained from Barclays.
The performance of an index is not indicative of the performance of any particular investment.
Index data for the S&P 500, MSCI EAFE, and Russell 2000 were obtained from FactSet. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital
gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing.
Tax rates were obtained from the Internal Revenue Service. The taxable account scenario applied Investors may not make direct investments into any index.
the highest marginal tax rate in each calendar year allowable per the IRS to compute hypothetical
dividend and interest taxes. The study assumes all equity dividends are qualified for the periods * For the one-year real real return, the real estate commission was not deducted. For longer
covered under The Jobs and Growth Tax Relief Reconciliation Act of 2003. The tax deferred account periods, a 6% commission was applied to approximate the economic reality of a typical real
scenario applied the highest marginal tax rate at the end of the 30-year period. estate investment transaction.

Index & Asset Class Descriptions

Bonds are debt investments in which an investor loans money to an entity (corporate or govern-
mental) which borrows the funds for a defined period of time at a fixed interest rate. Bonds are
subject to certain risks including loss of principal, interest rate risk, credit risk, and inflation risk.
The value of a bond will fluctuate relative to changes in interest rates; as interest rates rise, the
overall price of a bond falls.
Government bonds, or Treasuries, are negotiable debt obligations of the U.S. government, secured
by its full faith and credit and issued at various schedules and maturities. Income from Treasury
securities is exempt from state and local, but not federal, taxes. Treasury bill data is based on
a one-bill portfolio containing, at the beginning of each month, the bill having the shortest
maturity not less than one month. Intermediate government bond data is based on a one-bond
portfolio with a maturity near five years. Long-term government bond data is based on a one-bond
portfolio with a maturity near twenty years.
Municipal bonds are debt obligations issued by states, cities, counties, and other governmental
entities. Municipal bonds offer a predictable stream of income which is free from federal and, in
some cases, state and local taxes, but may be subject to the alternative minimum tax. Because
of these tax savings, the yield on a muni is usually lower than that of a taxable bond. Higher
grade munis have higher degrees of safety with regard to payment of interest and repayment of
principal and marketability in the event you must sell before maturity. This study uses Barclays
Municipal Bond Index as a general representation of the municipal bond market.
A corporate bond is a debt security issued by a corporation. Corporate bonds are taxable and
have more credit risk compared to Treasuries. This study uses Barclays U.S. Corporate Investment
Grade Index, which is a general representation of the investment-grade corporate bond market.
A stock is a share in the ownership of a company. As an owner, investors have a claim on the
assets and earnings of a company as well as voting rights with the shares. Compared to bonds,
stock investors are subject to a greater risk of loss of principal. Stock prices will fluctuate, and
there is no guarantee against losses. Stock investors may or may not receive dividends. Dividends
and gains on an investment may be subject to federal, state or local income taxes.
Standard & Poor’s 500 Stock Index is an index consisting of 500 stocks chosen for market size,
liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading

7
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Before investing, carefully consider the investment goals, risks, charges, and expenses. For a prospectus containing
this and other information, contact your financial advisor. Read it carefully before investing.

Thornburg Funds are distributed by Thornburg Securities Corporation.

7/31/12
TH1401