Archive for October, 2014

Historical returns of traditional asset classes

Friday, October 10th, 2014

The other day an acquaintance said that her nearly grown son wants to invest for the future but he doesn’t have the time nor the market savvy to invest in anything outside of an index tracking stock or mutual fund. She thought that investing in the S&P 500 or perhaps gold would be the most beneficial, but I countered with the small cap Russell 2000 (IWM is the index’s most popular tracking stock).

Sure, it’s more volatile in the short-term but in the long term it’s been tough to beat. As a favor, I said I’d run the historical numbers for the traditional asset classes (1928 to present). She was blown away by the results:

Asset Class Total Return
Class %
Small cap stocks 2,040,481
REITs 738,445
Large cap stocks (S&P 500) 329,976
International stocks 206,415
Long-term corp bonds 15,502
Long-term gov’t bonds 10,451
Intermediate gov’t bonds 8,288
International bonds 6,073
T-bills (cash) 1,837
Gold (since 1928) 5,786

The above numbers reflect total returns since January, 1928 through September, 2014. (Total returns include price appreciation plus dividends.)

1. Small-caps clobber all other asset classes. Going forward, I believe that biotechs and new tech (alternative energies, internet, space exploration, nanotech, quantum entanglement technologies, etc.) will be among the big leaders.

2. Long-term corporate bonds are better than long term government bonds due to the risk premium (higher rate of interest earned) because of the possibility of default. (Government bonds are considered to be essentially risk-less.)

3. Real-estate investment trusts (REITs) have always been solid and should be a major component of any portfolio.

4. The returns of large-cap US stocks (aka the S&P 500) still dominate the returns of International stocks. (But frontier markets shouldn’t be overlooked as future sources of increasing growth.)

5. Gold: The yellow metal was actually illegal to own in bullion form from 1933 to 1974. During those years the price was fixed by the government but afterward the law was changed and the price was allowed to float. Gold has been a terrific investment over some periods since the mid-’70s but it’s been a bad one in recent years. Since its mid-2011 peak, the metal has shed about 36%. The good thing about gold is that it is portable; the bad thing is that it does not pay a dividend. The other bad thing is that gold doesn’t have much use outside of being decorative while platinum and palladium have use in industry.

6. Cash (T-bills): Over the long term, cash has not been king. Stashing your cash under the mattress is the worst place to put your money. But in times of unrest, it’s better than being in losing investments.


When considering asset allocation, you must also take into account your investment horizon. Are you in your early 20’s and investing for the next 50-70+ or are you much closer to retirement and need to shelter your nest egg? This is where Modern Portfolio Theory comes into play and why investing only in the currently highest returning asset classes is not always the best move because volatility risk must be taken into account.

Modern Portfolio Theory strives to minimize risk over the the long term but it can become a major hindrance to portfolio returns during sharp market corrections. To learn one way to utilize the benefits of the asset allocation strategy provided by Modern Portfolio Theory while also protecting your nest egg during sharp market corrections (especially if you’re looking at less than 20 years to retirement) please visit the Portfolio Preserver website.

[Note: Total return data was provided by the Portfolio Preserver