When you lay out the returns of a variety of asset classes over time it’s hard to find any meaningful patterns. The chart below shows the returns on 10 different asset classes over time and it’s quickly evident that what was the star of last year rarely shines the brightest the following year.
In fact, starting in 2000 if you invested in the top performing asset class of the previous year (Emerging Markets Value led the way in 1999), over this 15-year period you would have earned an annualized return of just 1.89%, basically the equivalent of cash over that period, and far below any mix of asset classes. Imagine all the investors who piled into US REITs following a stellar 2006 only to see losses on that asset class of 17.56% the following year or being scared into bonds in 2009 just as stocks start their unexpected recovery. Not only was the overall return poor, but the amount of volatility experienced over the period was extremely high.
Over the last 15 years a blend of 65% stocks and 35% bonds was never the top performer but at the end of the period resulted in an annualized return of 6.07% compared to the S&P 500 which averaged 4.24%.
The appeal of trying to outguess the market is significant, but time and time again the investment world shows us we can’t predict what will occur next. Instead we should diversify acknowledging we won’t be the best performer each year, but will have ensured no one asset class will ever spell the doom for our financial goals.