Below you’ll see what people in the investment business refer to as the periodic table of (asset class) returns—named in honor of the periodic table of elements that we all studied in our high school chemistry class. Koch Capital updates this table annually with the one-year returns and standard deviation (volatility) of 13 benchmark asset class Exchanged-Traded Funds (ETFs), which collectively represent a broad, global swath of the investable universe.
The table lists the annual returns for each asset class, ranked from best to worst such that the asset classes with the highest returns are listed above those with the lowest returns for the year. The risk column to the far right displays the annual volatility of each asset class to its immediate left; the higher the value, the more volatile (risky) the asset class.
Click here to view the entire chart and remember that past performance is not indicative of future results
Source: Koch Capital, Quantext Portfolio Planner
The asset classes are organized by color to make the table presentation more interesting. For example, all the equity (stock) categories are shown in the blues and purples; the S&P 500, a common equity benchmark, stands out in its signature black. The fixed income (bond) categories are in red, orange and tan, and bleed into the yellow colors, which represent alternative asset categories. For this demonstration, the alternatives include gold and commodities. In green, cash (and cash equivalents), the thirteenth asset class category, is represented by short-term Treasury bonds that mature in one year or less.
In 2014, the highest ETF total returns were realized right here in the good old U.S. of A. Domestic REITs (real estate), U.S. long-term Treasury bonds, S&P 500 (large capitalization), and U.S. small cap returned 29%, 24%, 14% and 9% respectively.
What’s even more remarkable in 2014, for a second consecutive year, was the lack of volatility, or risk as measured by standard deviation, in the S&P 500. In normal years, the S&P 500 daily prices fluctuate around a long-term average of roughly 15%, but exhibited almost half that level of volatility in 2013 and 2014. With high equity market valuations going into 2015 and the end of the Fed’s Quantitative Easing (QE) program, don’t bet on that trend to continue going forward in my humble opinion.
As humans, our brains naturally try to find patterns in what we see. Do you see any predictable pattern of asset class returns from one year to the next? The answer is no. The point here is that asset class returns are random no matter how convincingly your brain tells you, “Hey, I see a repeating historical pattern here and I’m sure it will repeat in the future.”
The more subtle piece of information in the table above is the relationship between risk and correlation. Even though long-term Treasury bonds (red) are volatile (risky), this asset class is uncorrelated with most stock-based asset classes. When the S&P 500 (black) has good year (over 10% annual return), long-term Treasury bonds (black) tends to underperform, and vice versa. Thus, you get the classic zig-zag relationship between stocks and bonds/alternatives, a return saver courtesy of real diversification that helps your portfolio survive in years like 2008 and 2011. For the first time since I started tracking these benchmark asset class ETF returns in 2001, both the S&P 500 and long-term Treasury bonds delivered double digit returns. Again, don’t expect a repeat of this rare event in my opinion.
About Jim Koch
Jim Koch is the Founder and Principal of Koch Capital Management, an independent Registered Investment Advisor (RIA) in the San Francisco Bay Area. He specializes in providing customized financial solutions to individuals, families, trusts, business entities and other advisors so they are better able to achieve their goals. Jim sees himself as an “implementer” of financial innovation, using state-of-the-art technology to provide practical investment management and retirement planning solutions for clients.
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