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).

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).

Historical Asset Class Returns 2012

Almost everything one needs to know about investing can be found in this chart. It is worth studying for several minutes.  This is a re-post from last year with updated chart returns through 2012.  2012 was a good year for investors in general, and very good for stocks in particular.

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 10-13% annual returns over 20 years while the various bond classes averaged just 5-8%.  
2. Stocks don't beat bonds EVERY year, but they win about 75% of the time.  You will also notice that a stock class claimed the top spot in 11 out of the past 15 years (and 16 out of the past 20 years).

Why I LOVE to HATE Target-Date Funds

A survey, by the Plan Sponsor Council of America, found that while equities amount to 63% of 401(k) plan assets (yea!), the most popular investment option utilized in 401(k) plans is actively-managed equity funds (boo!).


The survey also found  target-date fund popularity grew from less than 3% of 401(k) plan assets in 2006 to 13% in 2010.  In that same time frame, the percentage of plans that offer target-date funds rose from 33% to 63%.  Casey Quirk & Associates project that almost 50% of 401(k) plan assets will reside in target-date funds within 10 years.


I have a LOVE / HATE relationship with target-date funds.

I love the concept of “target-date” mutual funds.  The idea is an employee with a 401(k) only needs to know their approximate retirement date and then put all their retirement money into one fund.  Target date funds are designed to hold a mixture of stocks and bonds that systematically reduces the volatility or market risk of the fund by slowly increasing the allocation towards bonds and reducing stocks over time. 

Owning a mixture of stocks and bonds that slowly shifts towards more bonds and less stocks over time with annual rebalancing is exactly what I recommend folks do in all my books.  Target-date funds do all this for you and simplifies your life.  This is an awesome idea that makes retirement planning a no-brainer, right? So, what’s my problem?

Below are the stock / bond allocations for two target date funds managed by two very well known mutual fund firms lead by famous Chief Investment Officers. 

Question:  Which fund has a target retirement date of 2030?

Ticker Symbol	% Stocks	% Bonds	% Other
PRLIX	38%	56%	6%
LMVIX	73%	22%	5%

Answer: Both!

So there you have a problem – target-date retirement fund allocations vary significantly from fund family to fund family.  Two people of the same age, with different employers, could have extremely different asset allocations even if both are invested in target retirement mutual funds with an estimated retirement date of 2030.

Question:

Which fund above do you suppose is managed by a mutual fund company run by a very famous bond fund manager, and which is managed by a mutual fund company run by a very famous stock fund manger?

Answer: 

The fund with the biggest allocation to bonds is run by a firm with a very famous bond fund manger and the fund with the largest allocation to stocks is run by a very famous stock fund manager. 

PRLIX is the ticker symbol for the PIMCO RealRetirement 2030 Fund and PIMCO’s Chief Investment Officer is Bill Gross – perhaps the most famous bond fund manager on the planet.

LMVIX is the symbol for the Legg Mason Target Retirement 2030 Fund and the Chief Investment Officer for Legg Mason is Bill Miller – one of the most famous stock fund managers on the planet.

There is a saying, “if all you have is a hammer, everything starts to look like a nail.”  This could be the problem with these two funds, as PIMCO, the famous bond fund company clearly favors bonds while Legg Mason, the famous stock fund company clearly favors stocks.

I’d actually recommend an allocation of 60% stocks and 40% bonds for the “typical” person retiring around 2030.  Thus, my opinion is the Legg Mason fund above is too aggressive and the PIMCO fund is far too conservative for the “typical” person retiring in 2030. 

This brings us to another problem: What is “typical?”

I would argue that there are very few “typical” people and the one-size fits all target retirement date mutual funds may not be appropriate for many investors.  Two people that are both looking forward to retiring in 2030 could be VERY different people. 

First, they could be very different in age if one is planning to retire “early” at say 55 years of age, while the other may be planning to work until 75.  The older person, all other things being equal, should probably have a more conservative portfolio.

Second, even if two people are the same age and plan to retire the same year, they could have VERY different health.  Someone in perfect health might need a more aggressive portfolio than someone who is in poor health - perhaps suffering with cancer or diabetes or some other health problem.

Third, two people could be of same age and health, but one has $50,000 saved and the other might have $1.5 million saved.  I would argue the wealthier person can afford to be more aggressive with their portfolio even late in life.

Fourth, consider two people the same age, health, and both have saved $500,000 for retirement.  One could be single while the other is married with 4 kids in college.  Fifth, perhaps one will receive a pension of $40,000 per year while the other has no pension.  Sixth, maybe one lives in San Francisco and pays $6,000 a month in rent while the other lives in San Antonio and lives in a house with no mortgage?

Even if you could come up with two people that are identical in EVERY economic way possible, they could be VERY different emotionally.  Smooth Sally might be very laid back and calmly reviews her 401(k) statement once per quarter, while Nervous Nick watches too much CNBC and checks the value of his 401(k) twice before lunch every day.  Nervous Nick should be in a much more conservative portfolio than Legg Mason would likely put him in, while PIMCO might put Smooth Sally into a portfolio that is far too tame.

Imagine a 21 year old man who shows up for his first day of being a waiter at Denny’s.  His boss hands him the “typical” employee uniform – a size 10 dress.

My point is there are no “typical” people.  Target date retirement funds only take into account one of dozens of potential variables that make EVERY investor different.  This is why I love the idea of a simple one-size fits all mutual fund, but in reality, one size does NOT fit all. 

This is also why I include a questionnaire at the beginning of all of my books that attempts to give each reader an investment recipe that is seasoned specifically and not typically.