Updating the Periodic Table of Annual Returns

by: Richard A. Anderson

I’ve gotten into the habit of annually updating the chart below that shows the calendar year returns for a number of different asset classes commonly used by investors to construct diversified portfolios. I call this chart the periodic table of annual returns.

In science, elements are the fundamental components of all living matter. All of the chemical elements are listed neatly on a chart known as the Periodic Table of Elements.

In finance, asset allocation, or the process of dividing your investment portfolio between different asset classes, is the most important piece in determining long-term investing success. Therefore, it makes sense to have a chart we can quickly reference to see how the most popular asset classes have performed in any given year.

This exercise serves as a reminder that picking the best performing asset class in any given year is a challenging proposition. It may appear obvious in hindsight but choosing the best performing asset class beforehand is nearly impossible.

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Below are a few comments I have compiled that put this chart in perspective:

  • Emerging markets stocks have been the best performing asset class since 2001. It may be hard to believe given the relatively poor performance as compared to U.S. stocks since the end of the Global Financial Crisis, but emerging markets stocks were strong performers in the mid-200s leading up to the Global Financial Crisis.

  • Emerging markets stocks and Global REITs are tied for most calendar years as the best performing asset class. Both were the best performing asset class five times out of the eighteen calendar years.

  • Commodities have been the worst performing asset class since 2001. Commodities have a similar story to emerging markets stocks, in that performance during the mid-2000s leading up to the Global Financial Crisis was good. However, commodities have posted negative returns in six of the last eight calendar years, and three of those six years were double digit losses.

  • Commodities also have the distinction of being the worst performing asset class in a calendar year six times, more than any other asset class.

  • The average range of returns between the best performing and worst performing asset class for each calendar year is 37.7%.

  • Not once in this eighteen-year time period did the top performing asset class repeat. Yet, there were five times when the worst performing asset class repeated.

  • If you had the insight to pick the best performing asset class each year, that would have generated a compound annualized return of about 27% over this 18-year period. That is more than triple the return of emerging markets stocks! However, if you were not so lucky and picked the worse performing asset class each year, you would have generated a compound annualized return of about -10%.

  • If you had invested in the previous year’s best performing asset class each year, you would have generated a compound annualized return of about 0% over this period.

  • The diversified portfolio, which is a constructed portfolio of indices that is 55% global stocks, 35% global bonds, 5% global REITs, and 5% commodities, consistently ranked in the middle of the pack. The diversified portfolio was only in the bottom three once and was only in the top three once.

I hope this chart puts in perspective the difficulty in predicting which markets will perform best from year to year. By holding a globally diversified portfolio and not chasing past performance or trying to outguess other market participants, investors are instead well positioned to capture returns wherever they occur. Over the last few years, the strong performance of U.S. stocks has led some to question the value of diversification. The value and perception of diversification ebb and flow as market environments change. It is helpful to remember history has shown not one asset class around the world to be a consistent outperformer. By investing in a globally diversified portfolio, you can be confident you will hold the best (and worst) performing asset classes each year.