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).

Everything you need to know about investing, almost.

Almost everything you need to know is in this chart. It's worth looking at for a few minutes.

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 9-13% 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).
3. Stock returns are much more variable or volatile than bond returns.  In the far right column of the chart you will notice

Increase Your Investment Earnings +180%

The Editor’s Note in The Wall Street Journal Sunday was somewhat interesting.  The editor speaks about the returns an investor with a 401(k) would have earned over the past 12 years.  There is a chart that shows the growth of a 401(k) account where $250 is invested every two weeks and the hypothetical employee also received a company match of 50% or $125 per pay period.  In 12 years the employee would have an account worth approximately $137,000 if all money went into an S&P 500 Index Fund.  He then points out that the lesson to be learned is to “always get the company match.”  This of course is an important lesson.

However, I believe the author missed an opportunity to point out another very important lesson that I firmly believe is vastly understated in its importance with most investors.  I’ve said it before, and I will say it again, BUY MONTHLY AND REBALANCE ANNUALLY.  I took The Wall Street Journal’s hypothetical 401(k) above and made a few tweaks to show everyone just how important diversification and rebalancing truly are.

First, I take issue with the editor’s assumption that a 401(k) retirement account be invested in only one S&P 500 Index Fund.  First, that is not a properly diversified account.  Second, the owner of the account would also miss out on the benefits of yearly rebalancing that can enhance returns by systematically trimming your winners and adding to your losers year after year after year.  So here are the figures that I wish the editor ran, but I have calculated for you.

The article shows the investor would amass $137,000 by consistently investing in the S&P 500 Index fund.  However, if the investor instead invested just 60% of their account in the S&P 500 Index fund and the remaining 40% in a bond index fund AND rebalanced once per year, the investor would have amassed an account value of over $151,000 or $14,000 more than investing in the S&P 500 Index fund alone.

What if we took this a step further?  What if this investor bought one of my books (and actually read it) and discovered that there are several asset classes an investor should utilize in order to be properly diversified.  Let’s take the typical 50-year-old which would again have a 60/40 stock/bond mix as the last example, but with a few tweaks. 

Of the 60% of the account invested in stocks only 30% would be invested in the (large cap) S&P 500 Index, 10% would be invested in a mid cap stock index fund, 10% in a small cap index fund, and 10% in an international stock index fund.  Further assume that the 40% invested in bonds would be allocated 20% to TIPS bonds (treasury inflation protected securities), 10% in long-term bonds, and 10% in intermediate term bonds.  Oh, and don’t forget the annual rebalancing.  This account would accumulate $173,000!

That is a difference of $36,000 or 26% more just by adding diversification and rebalancing.  I should also point out that if you add up all the monthly contributions, you would see that the original investor (in all cases) would have invested about $117,000.  Thus, the original portfolio would have earnings of just $20,000 ($137,000 - $117,000).  By adding the principles of diversification and rebalancing, the account would have earnings of $56,000 ($173,000 - $117,000).  We are talking about earning $56,000 instead of just $20,000, or an increase in earnings of 180% just by diversifying and rebalancing once per year!

Summary

$250 bi-weekly contribution with $125 matching funds (1999-2011)

Total dollars invested: $117,000

                                                                        Ending                                     % Increase

Portfolio                                                           Value               Earnings          in Earnings

S&P 500 Index only                                        $137,000         $20,000           --

Add bonds and annual rebalancing                $151,000         $34,000           +70%

Proper diversification and rebalancing           $173,000         $56,000           +180%

 

Moral of the story:       Investing in an S&P 500 Index fund is not an investment strategy.

Lesson:                       Diversify and rebalance. 


See my books on Amazon by clicking here.

Rebalance your portfolio annually

Over the past few weeks I’ve had numerous friends express concern about the economy and financial markets and have asked for my thoughts.  My thoughts follow…

The way I look at it, everyone has to make a choice between two possibilities and plan accordingly:

(1) Anarchy will reign - stockpile guns, ammo, barbwire around your farm and bomb shelter etc.

(2) We'll get through this like we have for 200 years - rebalance your portfolio and buy stocks when they are down.

I can respect folks who choose either of these options, but anything in between is pointless.

Being 100% cash won't work in either scenario. If the financial system collapses, they won't be able to get their cash out of whatever bank it is in.  Even if they could get it, cash will be worthless during true anarchy. Not many folks would sell their last loaf of bread for any amount of gold either.  

In 2008 we truly were standing at the edge of anarchy - that was scary.

That was the scariest time in our economic history... Oh wait, maybe World War I was scarier,

and WWII. Oh yeah, 9/11 when stock market was closed for a week - now that was scary!  Don’t forget the turmoil caused by the Korean and Vietnam wars.  Then there were the race riots in the 60-70s. Can you imagine riots? I can't but it was going on when we were kids. Assassination of JFK, Reagan shot, Nixon's Watergate, Clinton's Lewinskigate. How about nuclear missiles a couple hundred miles off the shores of Florida? Now that must have been really scary.

I'm forgetting a dozen catastrophes I'm sure. Yet, the stock market averaged

about +10% annualized return throughout all this. To be sure, the stock market is never up in a straight line.

What is beautiful is the crookedness of the returns. Each and every instance I listed

above was a BUYING opportunity.  

Folks that are 100% liquid now may well look like geniuses.

Greece could default and implode the entire European Union. Moody's could agree with S&P and downgrade the US credit rating a meaningless notch. Politicians might shut down the federal government, again (yeah, that's right, it's happened before and in our lifetime too).

But, even if those "liquid" folks are right and the market dives another -20%, they'll never have the foresight or fortitude to buy back in at the bottom when everything looks it's worst. Thus, they can be right ONCE and cost themselves a ton of money when the market snaps back. The folks that are liquid now,

are likely liquid because they sold out before the bottom in the market in March 2009.  They likely watched the Dow fall from 14,000 to 8,000 and finally decided to sell all their stock funds. They realized they were geniuses as the Dow continued it's descent to 6,500. But, in the end they would have been better off doing nothing as the Dow is now back up to 11,000 (even after the recent decline) and MUCH higher than where they likely sold. Better yet, instead if selling at 8,000 they would have done well to BUY at 8,000 even while that was not the bottom and the market fell further.

That is another great point; one does not have to pick the exact bottom in the stock market to make a lot of money. The folks that bought stocks at Dow 8000 surely felt more pain as they watched it continue to fall to 6500. But, with the Dow currently at 11,000 they certainly are happier now than the folks that sold at 8000.

We should almost be grateful for each of these "opportunities" that the "sky is falling" alarmists provide us.

Embrace the volatility. The easiest way to do that? Own a mixture of stock and bond index funds and....

Buy monthly with your paycheck and rebalance annually on your birthday.

Buy and rebalance, buy and rebalance - year after year after year. 

Over the course of a lifetime, you will have bought low and sold high over and over and over again.

Rebalancing is easy to do in “normal” years. In fact, it’s almost unnecessary most of the time.

When rebalancing is crucial is in times like these – when you have to buy when everyone else is selling.

But, history has shown time and time again, the time to buy is when everyone else is selling.

Rebalance annually and mechanically, don't "think" about it.

Turn off CNBC. Be oblivious. Be happy. Be wealthy.

Ron

P.S. You can find more information in one of my 4 books on Amazon at the link below.

www.InvestorCookbooks.com