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<\/p>\nI\u2019ve been writing at\u00a0A Wealth of Common Sense for more than 10 years now.<\/p>\n
That means we\u2019re going on a decade\u2019s worth of asset allocation quilts on this blog. The moral of the story is I\u2019m getting old.<\/p>\n
Here\u2019s the latest update through the end of 2023 along with those 10 year trailing returns:<\/p>\n
<\/p>\n
Some observations:<\/p>\n
Bad to good and good to bad.\u00a0<\/strong>Last year was bad for the majority of asset classes. This year was good.<\/p>\n Last year commodities did well. This year they didn\u2019t.<\/p>\n Last year stocks got crushed. This year they bounced back.<\/p>\n Last year an equal-weighted portfolio of these asset classes was down double-digits. This year it was up double digits.<\/p>\n Markets aren\u2019t always so black and white like this but sometimes mean reversion rules the day.<\/p>\n What will it take for commodities to outperform?<\/strong>\u00a0Hard assets had good performance in 2021 and 2022.<\/p>\n There was talk of a supercycle. Inflation was running hot. There was war in Ukraine and the Middle East. Government spending and debt have been out of control.<\/p>\n Yet commodities\u00a0fell<\/em>\u00a0yet again in 2023.<\/p>\n The 10 year returns are still negative.<\/p>\n In fact, a basket of commodities is down nearly 50% in total since the start of 2008, a time in which the S&P 500 is up almost 350%.<\/p>\n Commodities are cyclical so that will mean big upside volatility eventually. I just don\u2019t know when.<\/p>\n Large caps rule everything around me.\u00a0<\/strong>The S&P 500 was the leader of the pack yet again.<\/p>\n Large cap U.S. stocks have been outperforming basically everything else since the Great Financial Crisis.<\/p>\n From 2009-2023, the S&P 500 is up a stone\u2019s throw from 14% per year. That\u2019s a total return of close to 350%.<\/p>\n Even if we include 2008, the when the S&P fell 37%, large caps are up 10% per year through 2023.<\/p>\n This can\u2019t last forever but I\u2019m not going to complain about good returns on the biggest stock market in the world.<\/p>\n Emerging markets are down bad.\u00a0<\/strong>Remember when the BRICs were going to take over the world?<\/p>\n That was a good story in the early 2010s.<\/p>\n EM has basically been the opposite of the S&P 500 this century.<\/p>\n From 2000-2007, emerging market stocks were up more than 210% in total (15.3% a year) while the S&P 500 was up a total of just 14% (1.7% a year).<\/p>\n From 2008-2023, emerging markets are up a total of 28% (1.3% a year) versus the aforementioned 350% gain for the S&P 500.<\/p>\n Small caps and mid caps have held up well.\u00a0<\/strong>It seems like it\u2019s only just the biggest stocks in the United States doing well but small and mid caps have held their own.<\/p>\n The S&P 400 and S&P 600 are each up around 9% per year for the past 10 years.<\/p>\n That\u2019s pretty good considering how much\u00a0cheaper these stocks are than the S&P 500 right now.<\/p>\n Cash had a good year.<\/strong>\u00a0From 2008-2022, 3-month T-bills were up a\u00a0total\u00a0<\/em>of just 13%. That\u2019s an annual return of around 0.8% per year.<\/p>\n That makes sense considering how low the Fed held short-term interest rates for so long. Rates aren\u2019t so low anymore.<\/p>\n Short-term T-bills were up almost 5% in 2023. That\u2019s the best year for cash equaivalent since the year 2000 and the first time returns were over 4% since 2007.<\/p>\n You can thank the Fed.<\/p>\n We\u2019ll see how long those yields last.<\/p>\n Bonds have had a rough stretch.<\/strong>\u00a0The Aggregate Bond Index has roughly the same return at T- bills over the past 8 years.<\/p>\n Low starting yields combined with rising rates have led to a challenging market for fixed income investors.<\/p>\n Higher starting yields from current levels should help going forward.<\/p>\n I have no idea what this quilt will look like next year.\u00a0<\/strong>The reason this is my favorite performance chart is that it perfectly illustrates how difficult it is to predict the winners and losers in the short run.<\/p>\n There is no rhyme or reason to asset class performance from one year to the next.<\/p>\n Sometimes you get mean reversion. Other times momentum rules the day.<\/p>\n Sometimes asset class performance goes worst-to-first or first-to-worst. Other times the performance rankings take a random walk.<\/p>\n Investing would be a lot easier if you could predict the winners from year to year and simply shift your allocation around to sidestep the losers.<\/p>\n I\u2019ve never met an investor who has the ability to pull this off on a consistent basis.<\/p>\n Diversification means constantly feeling regret about something in your portfolio that\u2019s underperforming. That\u2019s a feature, not a bug.<\/p>\n It also means having something else in your portfolio that\u2019s outperforming.<\/p>\n Investing itself is a form of regret minimization.<\/p>\n You can concentrate your portfolio and have regret on occasion when you inevitably underperform. Or you can diversify and have regret all the time when something underperforms.<\/p>\n","protected":false},"excerpt":{"rendered":" I\u2019ve been writing at\u00a0A Wealth of Common Sense for more than 10 years now. 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