There seem to be countless stories of the stock market’s all-time highs and the fantastic returns we have experienced over the past several years. We thought we’d dig into those claims a bit more and research if that really has been the case.
Over the past 5 years, only two major asset classes in ten have experienced above-average returns! Given the supposed performance of the “markets,” many have been touting, this may come as a big surprise.
| Asset Class[1] | Average Annual Return (Historical)[2] | Last 5 Year Return (ending 6/30/2019) | Variance |
| US Large Cap Growth | 9.69% | 14.04% | 4.35% |
| US Small Cap Growth | 8.85% | 9.32% | 0.47% |
| Foreign Bonds | 5.98% | 4.43% | -1.55% |
| Real Estate | 8.91% | 6.44% | -2.47% |
| US Large Cap Value | 11.90% | 6.94% | -4.96% |
| US Bonds | 7.33% | 2.31% | -5.02% |
| Emerging Market Stocks | 8.84% | 2.49% | -6.35% |
| Foreign Developed Stocks | 8.63% | 2.04% | -6.59% |
| US Small Cap Value | 14.52% | 5.05% | -9.47% |
| Master Limited Partnerships (MLPs) | 11.35% | -7.20% | -18.55% |
As you may expect, all the high-flying growth stocks like Amazon, Google, and Facebook have generated great returns while the rest of the investing universe has languished. Further, growth stocks have historically trailed value stocks, so this outperformance is not what we would expect to see (but also not out of the ordinary).
Most importantly, this means a diversified portfolio of global stocks, bonds, real estate, and energy has underperformed a portfolio of US growth stocks. Should this change your investment strategy moving forward? We don’t think so, for several reasons:
- This is a fairly short time period, and decisions should be made looking at long-term data. Over five-year periods, investments can have wildly different results. Neither underperformance nor outperformance of an asset class over a five-year period tells us much as it is not a long enough period to make any substantial conclusions other than markets are volatile in the short term.
- Past performance does not predict future results. The five-year period ending in June of 2009 saw US growth stocks return -0.37% per year. Immediately following this lousy period, this asset class generated phenomenal returns over the next ten years. The idea that what has happened in the past will be predictive of the future rarely works. Loading up on the investment that has done the best recently reminds us of the saying that “Generals are always fighting the last war.”
- Global stocks and bonds and other diversifying assets have historically reduced portfolio risk and/or increased returns. We know that all of these investments listed above are generally uncorrelated to each other, meaning that another may be zagging when one zigs. This is actually a good thing in that it tends to reduce volatility in the portfolio. Take this piece of research- from 1970 through 2018, the S&P 500 generated a 10% return, while a Global Market Index[3]generated a 13% return. The best part is that the volatility associated with both of these investments over that period was nearly identical.
- Periodic underperformance is a feature, not a bug, of a diversified portfolio. Average returns are just that…average. That means we should expect that very often; returns will be below their average. There is just no way of getting around that. And since we know of no one that can determine which investments will outperform in the future, we find that holding a diversified portfolio (which will most likely mean you have both winners AND losers) is the best way to smooth out your investment experience.
