Q3 2017 Returns By Asset Class

For the last few quarters, I’ve posted returns by asset class (by representative ETF), as well as year-to-date, last twelve months, and last five years. While there is still no predictive power in this data, I updated those charts as of the end of Q3 2017 for those of you that are interested (see below).

2017Q3 Asset Class Performance

A few callouts from the data:

· All major asset classes finished Q3 positive, with the standout being Emerging Market Stocks at +8%. Foreign Developed Stocks were up ~5.5% with US Large Cap and Small Cap stocks up ~4.5% each. Emerging Market Bonds were up ~3%, Commodities (led by a bounce back in oil) up ~2.5%, High Yield Bonds up ~1.5%, and Real Estate Investment Trusts, US Aggregate Bonds, and US Short-Term Bonds all up 0.5-1%.

· While everything other than Commodities has been up year-to-date, Foreign Developed and Foreign Emerging markets are the strong winners, up 20% and 23% respectively. Both continue to play catch-up vs. the US stock market after under-performing significantly since the financial crisis (and even over the past 5 years, see the 5-year chart for more detail).

· Bonds (short & medium term) continue to perform, despite being in the midst of a Federal Reserve rate hike cycle. As I indicated last quarter, higher interest rates generally mean lower prices for bonds, but this is offset somewhat by the interest (which increases with higher rates) that those bonds pay. As long as rates don’t spike quickly, and as long as we stay away from long-term bonds (we do), bonds will continue to do fine and will continue to add a cushion to overall portfolios.

· After stagnating from 2014 thru late 2016, global stocks have been on a tear over the last 12 months. US and Foreign, Small and Large are all up 17-19% with virtually no corrections along the way. This will not continue forever. I promise that stocks will fall again in the future. They will of course rise again too, but prepare yourself for lower or negative returns at some point. It’s my nature to remind clients of the bad times during the good times and vice versa. Times have been very good recently.

· Repeating from last quarter as I know not all of you have the time to read this each quarter… On the five-year chart, you can clearly see the marked underperformance of foreign stocks (developed and emerging markets), emerging market bonds, and most notably, commodities (everyone remembers the massive declines in energy prices back in 2015). While commodities have bounced back slightly after bottoming in early 2016, they have a long way to go to regain their highs, and that is a very good thing for worldwide consumers (though not so good for oil-producing / oil-exporting countries). The underperformance of international markets can be viewed in one of three ways: 1) international stocks are now dirt cheap as compared to US stocks, OR 2) international economies are doing much more poorly than the US economy and therefore, due to limited future growth, their stock markets have fairly performed much more poorly than US stocks OR 3) some combination of the two. There is no way to know the answer, so we will remain diversified and will continue to include foreign stocks at a ratio of about 1:2 vs. US stocks in most portfolios. Note that this has really paid off over the last 9 months as indicated in the 2nd bullet point above. Foreign markets will sometimes outperform their US counterparts and US markets will sometimes outperform their foreign counterparts. We just can’t know when it will happen and so instead of trying to pick winners or losers, we believe it makes more sense to invest globally and be confident that population growth + productivity growth + inflation will result in nominal growth on average across all geographies and that in turn will result in long-term growth for a globally diversified portfolio of stocks.

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Q2 2017 Returns By Asset Class

For the last few quarters, I’ve posted returns by asset class (by representative ETF), as well as year-to-date, last twelve months, and last five years. While there is still no predictive power in this data, I updated those charts as of the end of Q2 2017 for those of you that are interested (see below).

Q2 2017 Asset Class Returns

A few callouts from the data:

· Most asset classes finished Q2 between +1.5% and +3.5%. The standout to the positive side was Foreign Developed markets (+6.4%) and the standout to the negative side was Commodities (-3.7% even after a fairly strong comeback in the last week and a half of the quarter) due mostly to falling energy prices. If there’s ever an asset class about which we should be ok with falling prices, it’s commodities. Lower gas prices, lower heating costs in the winter, and lower raw material costs for manufacturers combined with lower transportation costs, tends to keep consumer prices overall from rising too quickly.

· Year-to-date, Foreign Developed and Foreign Emerging markets are the strong winners, both up ~15%. Emerging market bonds have done really well too, up nearly 10%. These are also three of the asset classes that under-performed for much of the last 5 years and are finally starting to catch up to the US stock market.

· Despite the Federal reserve hike in short-term rates in June, the third hike since December, aggregate bonds and short-term bonds had (slightly) positive Q2 and year-to-date. Higher rates generally mean lower prices for bonds, but this is offset somewhat by the interest (which increases with higher rates) that those bonds pay. As long as rates don’t spike quickly, and as long as we stay away from long-term bonds (we do), bonds will continue to do fine and will continue to add a cushion to overall portfolios.

· The chart of the last 12 months really shows how diverse return have been across asset classes. Commodities have lagged badly, Real Estate Investment Trusts (REITs) have been slightly negative, US bonds have been about flat, Emerging markets bonds decently positive, High Yield bonds even better, and US Large, US Small, Foreign Developed, and Foreign Emerging markets doing well (thought the US outperformed in 2016 and it’s Foreign markets that have been getting it done so far this year). A portfolio that mixes all these asset classes together, all of which have positive expected returns for the long-term future, but none of which perform in lock step with each other, will have a positive long-term expected return as well, but with a much smoother ride than any individual asset class. This is the power of diversification.

· Repeating from last quarter as I know not all of you have the time to read this each quarter… On the five-year chart, you can clearly see the marked underperformance of foreign stocks (developed and emerging markets), emerging market bonds, and most notably, commodities (everyone remembers the massive declines in energy prices back in 2015). While commodities have bounced back after bottoming in early 2016, they have a long way to go to regain their highs, and that is a very good thing for worldwide consumers (though not so good for oil-producing / oil-exporting countries). The underperformance of international markets can be viewed in one of three ways: 1) international stocks are now dirt cheap as compared to US stocks, OR 2) international economies are doing much more poorly than the US economy and therefore, due to limited future growth, their stock markets have fairly performed much more poorly than US stocks OR 3) some combination of the two. There is no way to know the answer, so we will remain diversified and will continue to include foreign stocks at a ratio of about 1:2 vs. US stocks in most portfolios. I’m confident the tide will turn eventually and foreign markets will outperform their US counterparts. We just can’t know when it will happen and so instead of trying to pick winners or losers, we believe it makes more sense to invest globally and be confident that population growth + productivity growth + inflation will result in nominal growth on average across all geographies and that in turn will result in long-term growth for a globally diversified portfolio of stocks.

Q1 2017 Returns By Asset Class

For the last few quarters, I’ve posted returns by asset class (by representative ETF), as well as year-to-date, last twelve months, and last five years. While there is still no predictive power in this data, I updated those charts (minus the year-to-date since it is the same as the last quarter in this case) as of the end of Q1 2017 for those of you that are interested (see below).

Q1 2017 Asset Class Returns

A few callouts from the data:

· After lagging in Q4, emerging market stocks, foreign developed market stocks, and emerging market bonds led the way in Q1. These are also three of the asset classes that have under-performed for much of the last 5 years.

· The only losing asset class during Q1 was Commodities (energy, metals, agricultural products). This is somewhat surprising given that inflation has started to pick up a bit, but the impact of the global oil glut outweighed U.S. general reflation.

· Despite the Federal reserve hike in short-term rates in March, the second hike since December, aggregate bonds and short-term bonds had (slightly) positive returns over the last quarter and the last year. Higher rates generally mean lower prices for bonds, but this is offset somewhat by the interest (which increases with higher rates) that those bonds pay. As long as rates don’t spike quickly, and as long as we stay away from long-term bonds (we do), bonds will continue to do fine and will continue to add a cushion to overall portfolios.

· All major asset classes remain positive over the last 12 months.

· Repeating from last quarter… On the five-year chart, you can clearly see the marked underperformance of foreign stocks (developed and emerging markets), emerging market bonds, and most notably, commodities (everyone remembers the massive declines in energy prices back in 2015). While commodities have bounced back after bottoming in early 2016, they have a long way to go to regain their highs, and that is a very good thing for worldwide consumers (though not so good for oil-producing / oil-exporting countries). The underperformance of international markets can be viewed in one of three ways: 1) international stocks are now dirt cheap as compared to US stocks, OR 2) international economies are doing much more poorly than the US economy and therefore, due to limited future growth, their stock markets have fairly performed much more poorly than US stocks OR 3) some combination of the two. There is no way to know the answer, so we will remain diversified and will continue to include foreign stocks at a ratio of about 1:2 vs. US stocks in most portfolios. I’m confident the tide will turn eventually and foreign markets will outperform their US counterparts. We just can’t know when it will happen and so instead of trying to pick winners or losers, we believe it makes more sense to invest globally and be confident that population growth + productivity growth + inflation will result in nominal growth on average across all geographies and that in turn will result in long-term growth for a globally diversified portfolio of stocks.

Q4 2016 Returns By Asset Class

For the last few quarters, I’ve posted returns by asset class (by representative ETF), as well as year-to-date, last twelve months, and last five years. While there is still no predictive power in this data, I updated those charts (minus the year-to-date since it is the same as the last twelve months in this case) as of the end of Q4 2016 for those of you that are interested (see below).

Asset Class Returns

A few callouts from the data:

· While you’ve undoubtedly heard about the rally in stocks since the election, it’s easy to forget how poorly the quarter started in October, and easy to overlook that the rally didn’t extend to foreign stocks, in US-dollar terms, at all. Emerging markets suffered (threats of trade wars, tariffs, etc. don’t bode well for emerging markets that are big on manufacturing and cheap labor), and bonds suffered as well (forecasts for a stronger US economy, infrastructure spending, and tax cuts likely mean higher rates and higher inflation, which is bad for fixed income). Our clients’ portfolios have their stock allocation more heavily weighted toward US stocks, but the underperformance of foreign investments offset some of the growth in US stocks in Q4. Our clients’ portfolios have the bond allocation skewed toward short-maturities, which don’t react as poorly to increasing interest rates, and which reflect those higher rates in the future much more quickly than a portfolio of long-dated bonds would. Overall, the quarter had mixed results, but could have been far worse if we were more weighted toward foreign stocks and/or long-dated bonds.

· All major asset classes were positive for 2016 as a whole. That is a pretty big accomplishment considering where we were in mid-Feb (see 2016 chart). The best performers were US Small Cap stocks (we tilt portfolios toward Small Caps) which were up more than 18% on the year.

· On the five-year chart, you can clearly see the marked underperformance of foreign stocks (developed and emerging markets), emerging market bonds, and most notably, commodities (everyone remembers the massive declines in energy prices back in 2015). While commodities have bounced back after bottoming in early 2016, they have a long way to go to regain their highs, and that is a very good thing for worldwide consumers (though not so good for oil-producing / oil-exporting countries). The underperformance of international markets can be viewed in one of three ways: 1) international stocks are now dirt cheap as compared to US stocks, OR 2) international economies are doing much more poorly than the US economy and therefore, due to limited future growth, their stock markets have fairly performed much more poorly than US stocks OR 3) some combination of the two. There is no way to know the answer, so we will remain diversified and will continue to include foreign stocks at a ratio of about 1:2 vs. US stocks in most portfolios. I’m confident the tide will turn eventually and foreign markets will outperform their US counterparts. We just can’t know when it will happen and so instead of trying to pick winners or losers, we believe it makes more sense to invest globally and be confident that population growth + productivity growth + inflation will result in nominal growth on average across all geographies and that in turn will result in long-term growth for a globally diversified portfolio of stocks.

Q3 2016 Returns By Asset Class

At the end of Q2, I posted returns by asset class (by representative ETF), as well as year-to-date, last twelve months, and last five years. While there is still no predictive power in this data, I updated those charts as of the end of Q3 2016 for those of you that are interested (see below).

Q3 2016 Asset Class Returns

While Commodities and Real Estate Investment Trusts were down slightly during Q3, other asset classes were positive. All major asset classes are now positive year-to-date, and all except Commodities are positive for the past 52-weeks (this should turn around by the end of Q4 as the horrible Q4 2015 Commodity crash will roll off the 52-week chart by then).

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).

Q4 2014 & Calendar Year 2014 Returns By Asset Class

New highs in US Large Cap stocks did not follow through to many other asset classes in Q4 2014, largely because of currency shifts (US Dollar gains vs. virtually all other currencies which make foreign currency denominated investments worth less on a relative basis), lagging economic performance in Europe, and a sharp decline in energy prices (oil down over 40% in Q4 alone). The list bellow shows performance for a select set of asset classes using representative ETFs (or spot price in the case of a commodity) as a measure for each:

As always, I’ll provide the reminder that past performance is not indicative of future results and that long-term expected returns (used for planning purposes) remain unchanged.