https://www.financialsamurai.com/the-best-asset-class-performers-from-2001-2020/
Before I share the best asset class performers from 2001 – 2020, I want you to guess the following four things:
Of the following asset classes, the S&P 500, a 60/40 stock/bond portfolio, Bonds, REITs, Commodity, Emerging Market Equity, Small Cap, Homes, which performed best?
What was the annualized return for the best-performing asset class within 0.5%?
What was the annualized return for the worst-performing asset class within 0.5%?
What was the annualized return for the average investor within 0.25%?
If you guessed two or more correctly, you are very much in tune with the market. Therefore, in terms of how to invest, you may want to increase the actively managed percentage of your overall investments.
If you only got one out of four right, then you’re probably inline with the average investor. And if you got zero right, then you should probably be a 100% passive index investor or let a robo-advisor manage your money for you. All you have to do is electronically send in a check each month and the robo-advisor will asset allocate for you.
Now that we’ve gone through this exercise, let’s compare the actual results to your estimates. When it comes to honing your forecasting abilities, reviewing data and analyzing why you were wrong is very important.
If we can consistently make decisions with a 70% positive probability, we will do very well in life. Waiting until we have 100% certainty is often impossible and unnecessary.
Below are the best asset class performers compiled by J.P. Morgan, one of the largest traditional asset managers in the world. The firm charges clients 1.15% – 1.45% of assets under management. Once you get above $10 million, the AUM fee usually drops below 1%. Can you imagine paying $100,000+ a year in fees on your $10 million portfolio? Ouch.
Digital wealth advisors were created during the last financial crisis to help lower fees. Further, a lot of people started getting tired of active funds underperforming passive index funds.
As you can see from the results, REITs is the #1 performer with a 10% annualized return, followed by Emerging Markets Equity at 9.9%, Small Cap at 8.7%, and High Yield at 8.2%.
The S&P 500 returned a respectable 7.5% a year between 2001 – 2020. I think most of you would have guessed a higher return given the markets have done so well. However, don’t forget that between 2000 to 2012, the S&P 500 essentially went nowhere.
On a relative basis, Bonds at 4.8%, look pretty good given bonds are lower risk and less volatile. However, it’s very hard to allocate new money to bonds here with inflation elevated and the Federal Reserve beginning its bond tapering.
Homes at 3.7% is relatively impressive compared to inflation at 2.1%. One of the arguments naysayers of homes as an investment have argued is that homes generally only increase at the rate of inflation. But this wasn’t true for the 20-year period between 2001 – 2020. Further, once you add on leverage through a mortgage, the cash-on-cash returns for homes easily moves to the teens.
Commodity is disappointing at -0.5%. You would think commodities would do OK given most are finite resources that tend to hold their value during times of uncertainty. Commodities include metals, energy, agriculture, livestock and meat.