Q2 2016 Returns By Asset Class

The link below shows Q2 2016 returns by asset class (by representative ETF), as well as year-to-date, last twelve months, and last five years.

Asset Class Returns

While I don’t think there is any predictive power in this information, some of you may still find it interesting. A few call outs:

1) Commodities overall (energy, metals, agricultural products) are down more than 50% in the past 5 years.

2) Emerging market stocks are down almost 20% over the past 5 years. In fact, they never fully recovered from the financial crisis and are still down more than 25% from their October 2007 peak.

3) Large Cap US stocks (think S&P 500) have been consistent strong performers. It makes sense that that the S&P 500 is near an all-time high.

4) Note the diverse returns by asset class, especially bonds vs. stocks and US stocks vs foreign stocks. This diversification is what we ultimately want in portfolios. It “feels” bad when your home country is outperforming as the S&P 500 has for the past 5 years. There is a temptation to want to just invest in the S&P 500 since it has done well for a particular period of time in the past, but there are no guarantees that will continue for the future. In fact, it may be starting to reverse course (see #5 below). Diversification works over the long-term, not over the arbitrarily defined term.

5) Some of the worst performers over the last 5 years are some of the best performers year-to-date (commodities, emerging market bonds, emerging market stocks).

6) Notice the low, but consistent returns of US bonds. That’s why they’re part of your portfolio. They have very little (and often negative) correlation to the rest of the portfolio. These are true diversifiers in that they have positive expected returns, but tend to do well when other parts of the portfolio are doing poorly. The addition of bonds to a portfolio smooths out the roller-coaster of stock returns. The more bonds, the smoother the ride, but the lower the overall return will be.

7) While cash has paid essentially no interest over the past five years, Aggregate US Bonds have returned 20%, and with a very smooth ride along the way. This is why we favor bonds strongly over cash (other than as an emergency fund and for known upcoming spending).

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