Wednesday, January 11, 2012

Asset Class Update: 2011

It has been a while since we looked at the performance of the various equity asset classes we use within client portfolios.  I believe the last time was over two years ago, so it's definitely overdue.  Here goes:

You can see that 2011 was not a good year for stocks, with only Large Cap equities showing modest gains.  This explains why the S&P 500 and Dow Jones Industrial Average were positive for the year.  As we move down the list of asset classes, we see decreasing levels of performance, with Emerging Markets being the big loser for the year--down 18%.  This should not come as a surprise given all of the turmoil over sovereign debt which occurred last year.
The three year returns are actually encouraging.  Three years ago was the end of 2008, during the depths of the "financial crisis" when many experts were predicting a repeat of the Great Depression.  Even with the uneven economic recovery and continuing issues concerning debt and unemployment, the average asset class in the table returned 14% per year, which any of us would have signed on for on December 31, 2008.

What is more interesting, is when you look at the last column for 10 year annualized return.  Here we see almost the exact opposite of the 2011 results, with returns increasing as we move down the list.  To me, that illustrates the power of diversification. No one knows before hand which of these asset classes will perform better than any other over any period going in the future.  Basing an investment portfolio on such predictions is as likely to fail as it is to work, so our approach is to remained as diversified as possible all the time.

Finally, there is one important note.  The table above is not intended to show the performance of any investments or portfolios managed by Bond & Co.  It is a table of index returns, not actual investments which can be bought and owned by any of our clients.  Also, keep in mind that past performance is not an indication or guarantee of future results.