How consistent have the seven major asset classes been over the past 40 years? To answer this question, let's take a look at their performance over the past four decades: the 1970s, 1980s, 1990s and 2000s. (The 1970s consist of the 10-year period from Jan. 1, 1970, to Dec. 31, 1979, and so on.) The asset classes we will examine are large U.S. equity, small U.S. equity, non-U.S. equity, U.S. bonds, U.S. cash, real estate and commodities.
In addition to these seven individual asset classes, we will also study the behavior of a multi-asset portfolio consisting of equal allocations (14.3%) in all seven assets. The multi-asset portfolio was rebalanced at the end of each year.
This particular analysis will consider 10 annual investments of $1,000 each within each of the four decades being studied. Rather than simply making a single investment at the start of the 10-year period (the typical assumption driving all published returns), this study will assume an annuity investment that simulates how most people actually invest in their retirement accounts-that is, they invest periodically rather than simply making a single lump-sum investment.
The S&P 500 Index served as a proxy for the 40-year historical performance of large-cap U.S. equities, while the Ibbotson Small Companies Index from 1970-1978 and the Russell 2000 Index from 1979-2009 captured the performance of small-cap U.S. equities. The Morgan Stanley Capital International EAFE Index (Europe, Australasia, Far East) represented the performance of non-U.S. equities.
U.S. bond performance was captured by the Ibbotson Intermediate Term Bond Index from 1970-1975 and the Barclays Capital Aggregate Bond Index from 1976-2009. (As of late 2008, the Lehman Brothers indexes were renamed the "Barclays Capital" indexes.) Three-month Treasury bills represented the historical performance of cash.
The performance of real estate was measured by using the annual returns of the NAREIT Index (National Association of Real Estate Investment Trusts) from 1970-1977 (annual returns for 1970 and 1971 were regression-based estimates, since the NAREIT Index did not provide annual returns until 1972). From 1978-2009, the annual returns of the Dow Jones U.S. Select REIT Index were used (prior to April 2009 it was known as the Dow Jones Wilshire REIT Index). Finally, the Goldman Sachs Commodities Index (GSCI) measured the historical performance of commodities. As of Feb. 6, 2007, the GSCI became known as the S&P GSCI.
DECADES OF DIFFERENCE
Not surprisingly, the results were strikingly different from decade to decade (see "Winners by Decade" graphic at the end of this story). Here are some highlights:
• The 1970s. The 1970s was the best decade for small U.S. stocks and commodities. Real estate was next, and then came the multi-asset portfolio. Large U.S. stocks and cash had the same ending outcome. The laggard asset class that decade class was U.S. bonds.
Nevertheless, all seven individual asset classes finished above water. That means that the ending account balance was larger than the total amount of $10,000 invested (as calculated by a $1,000 investment at the start of each year for a period of 10 years).
A multi-asset portfolio consisting of equal allocations in all seven asset classes (and rebalanced at the end of each year) was a solid performer. In fact, the multi-asset portfolio outperformed large U.S. stock, non-U.S. stock, bond and cash.
• The 1980s. This decade was the heyday of non-U.S. stocks. The MSCI EAFE Index dominated all other six asset classes. Large U.S. stocks did well, as did commodities.
But once again, the boring multi-asset portfolio turned in a stellar performance. It outperformed small U.S. stocks, real estate, domestic bonds and cash.
• The 1990s. During the 1990s, the spotlight turned to large U.S. equities. In second place were small U.S. stocks, followed by non-U.S. stocks. The multi-asset portfolio was solidly in fourth position, ahead of real estate, commodities, U.S. bonds and cash.
• The 2000s. With the most recent decade of the 2000s finally in the rearview mirror, we find that every asset class struggled to finish in the black-that is, to have an ending balance that exceeded the $10,000 total investment. The winner was real estate, buoyed by great performance early in the decade, followed by U.S. bonds. Coming in third was the multi-asset portfolio.
These four decades reveal a clear pattern-broad diversification in portfolio design produces performance that is more consistent. By creating an equally weighted portfolio, you won't hit the home run (such as being fully invested in small stock and commodities in the 1970s, non-U.S. stock in the 1980s and large U.S. stock in the 1990s), but you will achieve the type of solid performance that ends up winning the batting title.