The past year was disappointing for investors across the board. The top performing broad asset class, real estate, saw gains of about 4.5%. US stocks, and investment grade bonds were barely up, while emerging market stocks and high yield bonds plunged. The performance numbers in each asset class were very weak compared to their historical performance.
While 2015 certainly wasn’t a good year, with the total US stock market up only 0.5%, there have been many times where it has been much worse. We only have to go back to 2008 to see an annual decline of 37%. Going back to 2000, four years posted negative returns with the market down over 7.5% each time. Comparatively, a positive 0.5% return does not seem so bad. While the long term average return for stocks is roughly 10%, it unfortunately does not provide that each and every year. Up, down and flat years in the market are to be expected. This volatility is the price that is paid to expect the 10% long term rate of return.
In addition, just because 2015 was a weak year for most asset classes it does not guarantee that 2016 will be any better. Markets are unpredictable and therefore the best way to protect your portfolio from taking a significant dive is to diversify across asset classes based on your long terms goals. What is the top performing asset class one year can be one of the worst performers the next. The following chart is a great example of the randomness of returns. (click to enlarge)
The chart shows the annual performance of many major asset classes and what becomes quite clear after reviewing is that there is a tremendous amount of variation in the order of the top performers from year to
year. In order to protect yourself from owning just the weakest performers you need to diversify across asset classes. This means owning areas of the market that have been out of favor. Currently, that includes international stocks and emerging markets stocks in particular. These asset classes could easily be the top performers in 2016.
Hopefully 2016 will be a better year. By sticking to a disciplined strategy that incorporates a broad range of asset classes you set up your portfolio for the greatest chance for success.
Index Performance Dec. Qtr. YTD
US Stock (Russell 3000) -2.05% 6.27% 0.48%
Foreign Stock (FTSE AW ex US) -1.71% 3.56% -4.46%
Total US Bond Mkt. (BarCap Aggregate) -0.32% -0.57% 0.55%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) -0.15% -0.65% 0.93%
Municipal Bonds (BarCap 1-10yr Muni) 0.34% 0.79% 2.45%
Cash (ML 3Month T-Bill) 0.03% 0.03% 0.05%