The latest thinking from Greenspring Advisors.

What Bull Market?

J. Patrick Collins Jr., CFP®, EA

There seems to be countless stories of the all-time highs in the stock market 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 a number of reasons:

  1. 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 or 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.
  2. 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 almost never 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.”
  3. Global stocks and bonds, along with other diversifying assets have historically reduced portfolio risk and/or increased returns. We know that all of these investments listed above generally are uncorrelated to each other, meaning when one zigs another may be zagging.  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.
  4. 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.
[1] Indices used:  Fama/French Large Cap Growth Research Index, Fama/French Small Cap Growth Research Index, Fama/French Large Cap Value Research Index, Fama/French Small Cap Value Research Index, Barclays Global Aggregate Bond ex-US Index, S&P Global REIT Index, Barclays US Aggregate Bond Index, MSCI World ex-US Index, MSCI Emerging Market Index, Alerian MLP Index
[2] Historical returns are since inception returns from each index
[3] Data source:  DFA Global Balanced Equity Index