Friday, January 3, 2014

Historical Asset Class Returns Chart 2013

2013 was a fantastic year for investors unless you mistakenly thought gold was an investment (Buying gold is a speculation, NOT an investment since it pays no dividends or interest. However, it is very pretty!).  Gold fell -28% in 2013 while US stocks rose 32-38%.  Long-term bonds and Treasury Inflation-Protected Securities (TIPS) had one of their worst years on record with each falling -9% in value in 2013.  In addition, tax-free bonds lost roughly -2% while high-yield or junk bonds returned +5%.

Hopefully you were not unfortunate enough to fall for a slick Wall Street pitch to "diversify" by "betting" on the following commodity prices.  However, I know certain prominent investors were burned by these sales pitches. 

2013 Returns
Crude Oil -2%
Heating Oil -3%
Aluminum -10%
Wheat -15%
Gold -28%
Silver -37%
Corn -38%

The chart above shows the last 15 years of investment returns by asset class. On the far right I have calculated the 20-year average for each asset class and pointed out the best and worst annual returns for the past 20 years for each asset class.  I love this chart - which is why I put it on the back cover of every book I have written.  Almost everything you need to know about investing can be learned from this chart:
  1. Stocks beat bonds over the long-run.  In the far right columns of the chart you will notice that all 4 of the major stock classes have a higher 20-year average return than all 4 of the major bond classes. You will notice that the various stock classes averaged 9-14% annual returns over 20 years while the various bond classes averaged just 5-7%.  
  2. Stocks don't beat bonds EVERY year, but they win about 75-80% of the time.  You will also notice that a stock class claimed the top spot in 11 out of the past 15 years (and 20 out of the past 25 years).
  3. Stock returns are much more variable or volatile than bond returns.  In the far right column of the chart you will notice that while Mid Cap Stocks have the highest Average Return of 14% annually, the returns have ranged from a high of +40% to a low of -42%.  Stocks have lost value in 6 out of the last 25 years.  This tells you that while you are better off in stocks over the long run, you must have patience during the ups and downs. 
  4. Bond returns are much less volatile than stock returns.  In the last 25 years, bonds have lost value only twice with the worst year in any bond class was just a loss of -9% while the worst annual return in stocks was -46%.  The safety in bonds comes with the trade-off of lower long-term returns as stated in #1 above. Most importantly, in the last 25 years, bonds rose in value in each of the six years that stocks fell. So, don't get rid of them after one bad year.
  5. Every one of the 8 different asset classes in the chart have finished first AND last at least once in the past 25 years (I only show 15 years in the chart here due to space constraints).  Quite often an asset class will go from first to worst and back again.  However, sometimes an asset class will stay first or worst for several years.  Just take a look at Foreign Stocks in the black boxes in the chart.  Foreign Stocks have been the best asset class in 5 of the past 15 years, but also the worst asset class in 4 of the past 15 years - while long-term bonds have been best twice and worst twice.  The patterns are obviously quite random and impossible to predict.  Despite what the talking heads blabber on CNBC - no one really knows which asset class will be best in any given year.    

So, after studying the chart it should be obvious that your investment strategy should include:

  • Put as much money in stock funds as you can possibly tolerate.
  • Put some money in bond funds to keep your sanity when stocks fall.
  • Diversify your assets across ALL 8 asset classes above no matter your age.
  • Rebalance your portfolio at least once each and every year (don't do the Hokey Pokey).
  • Buy only index funds (this is not obvious from the chart, but the reasons can be found all over my blog - try herehere, and here).
  • Don't buy commodities, real estate, hedge funds, or private equity funds.  These "alternative investments" always have huge expenses that completely offset any diversification benefits.  Stocks offer the best long term returns and bonds are the single best diversifier for stocks.  So, keep it simple.
  • Want help determining how much to put in each of the 8 asset classes? Get your own investment recipe tailored for your age and risk tolerance in 15 minutes or less with one of my books. You can buy them on Amazon or go to

 Happy New Year, and Happy Investing!

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