Sunday, January 4, 2015

Historical Asset Class Returns 2014

Here's the latest historical asset class returns chart ending 2014.  Overall, a terrific year for investors with all but one asset class rising (I don't consider commodities an investment asset class).

It is funny how the financial markets can make smart people do really stupid things.  The top performing asset class in 2014 was long-term bonds which rose nearly 20% in 2014.  In fact, US Treasury bonds with maturities longer than 20 years rose nearly 30% in 2014! 

This must come as a nasty a surprise, to the North Carolina State Treasurer who sold billions of dollars of bonds just before they sky-rocketed in value.  This was just the latest example of North Carolina Treasurer Janet Cowell zigging while the markets zagged.  Five years ago Ms. Cowell sold stocks in favor of "inflation-sensitive" assets (aka: commodities).  Her inflation portfolio has lost value over the past five years while the stock market rose each and every year and is now at all-time record highs.  2014 was another dismal year for speculators in commodities.  Oops! Sorry, North Carolina pensioners, likely no COLA (cost of living adjustment) for you.

If you rebalanced your portfolio last year (and you should always rebalance once or twice each year) you would have PURCHASED long-term bonds after they fell in 2013.  If you did, congrats, you are a better investor than North Carolina's State Treasurer.

The chart above shows the last 15 years of investment returns by asset class. On the far right I have calculated the 25-year average for each asset class and pointed out the best and worst annual returns for the past 25 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 8-14% annual returns over 25 years while the various bond classes averaged just 5-8%.  
  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 10 out of the past 15 years (and 19 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 4 of the past 15 years, but also the worst asset class in 5 of the past 15 years - while long-term bonds have been best 3 times 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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