The Best-Performing Asset Classes

 The Best-Performing Asset Classes

If you’re like me, you’re wondering what the best investments are.

It’s easy to find a lot of opinion, but not a whole lot of hard facts.

Articles abound on websites like Forbes, CNBC, and even Morningstar—but they ended up confusing me. They compare only a couple asset classes, and they frequently refer to different timeframes. For example, they look at the past 10 years for the S&P 500, the past 7 years for value stocks, and the past 13 years for growth stocks.

How am I supposed to make sense of that gibberish? I’m not looking for a load of blather; I want facts! Comparable, unbiased, non-cherry-picked facts. Is that really so hard?

Apparently, it is!...

I’ve had to do a lot of research to find some reliable numbers that can be compared. I got a great start with Paul Merriman’s excellent website, especially this set of charts [PDF].

While Merriman’s data was very helpful, I wanted data on more asset classes than the ones provided on that set of charts. I want all the asset classes!

How else are you supposed to make an informed decision?...

But it was a challenge to gather data from here, there, and everywhere. One source counts reinvestment of dividends, another does not. And different sources would often disagree on the exact same information!

Did small-cap value stocks return 14.3% in 1996? Or was it 25.9% that year? Or was it actually 21.41%? Or maybe it was actually 22.1%.

Four sources, four different figures—how frustrating! Just try to decide which of those four values is correct. Go on, I’ll wait…

And even worse, that’s only one asset class! I’m interested in large-cap blend, large-cap value, small-cap blend, small-cap value, international developed, emerging markets, US bonds, international bonds, corporate bonds, REITs, and gold.

Trying to determine the correct values for each of those asset classes is a nightmare! So I really needed one source, with historical data (and a consistent reporting policy) on all of those different types of investments.

Finally, I found a source that had all of those and more: Portfolio Visualizer.

I’ve been using their backtesting and Monte Carlo tools for years, but I decided to go digging and see if I could find the raw data they used. To my delight, that data was actually listed on their website! Here’s the link: Asset Class Returns.

The data on many of these investments dates back as far as 1972. However, some investments only go back to the 1980s or 1990s.

I was a bit disappointed that it didn’t go back further; Paul Merriman’s data stretches back to 1928 and Professor Robert Shiller’s monthly S&P 500 data goes all the way back to 1871!

Still, Portfolio Visualizer’s dataset is better, and more comprehensive, than most.

Whew! All that work, just to find some reliable information! Now—what are the best-performing asset classes?

Disclaimer: These numbers are approximate. Remember, this is a compilation of the best data I can find. I cannot guarantee that these figures are precise, nor that they’ll agree with other sources.

Got that? Okay, here goes:

Investment           CAGR          Years

1. Small-cap value    13.07%      1928-2020

2. Small-cap blend   12.37%       1928-2020

3. Large-cap value   11.04%        1928-2020

4. Total US market   10.83%        1972-2020

5. S&P 500                10.01%        1928-2020

6. REITs                       9.43%         1972-2020

7. Global ex-US          7.14%         1986-2020

8. US Bonds                6.91%         1970-2020

9. Emerging market   6.54%        1995-2020

10. Gold                         6.09%        1955-2020

11. Int'l value                5.34%        1995-2020

Best performance? Small-cap value, just as Paul Merriman said. His advice to put most of your money into a target-date fund, and supplement with small-cap value, is looking like a pretty good bet.

If you’re a DIY investing enthusiast like me, you might want some combination of:

• Total US Market (10.83% per year)

• Small-cap value (13.07% per year)

• REITs (9.43% per year)

• Global ex-US (7.14% per year)

• US bonds (6.91% per year)

Why not just take the top 5? Well, because they’re all US stocks, and are fairly highly correlated (meaning they move up and down together—with the emphasis on ‘moving down together’).

Of course, you should think long and hard about what you want to own, and in what percentages, and why. A good investor can answer those questions.

My main selections are: Total US market, REIT, and Total US bonds. Why these? Well, that way, I have broad and diversified exposure to stocks, real estate, and bonds. And I pay extremely low fees by using index funds for these asset classes.

I also have a smaller amount of money in small-cap value, international value, and emerging markets. Why these? Well, for small-cap value, it’s obvious: I want a piece of the best-performing asset class in history. Plus, the total US market index is, by its very nature, tilted toward large-cap. Holding small-cap value helps to even that out a bit.

As for international value and emerging markets, I think those have more promising growth potential for the next 50 years. But I could be wrong, which is why I have relatively small positions in these funds. Most of the heavy lifting in my portfolio is done by a total US market index fund.

You may prefer simplicity. If that’s the case, I’ll echo Paul Merriman’s recommendation: put something like 90% in a low-cost target-date retirement fund, and the other 10% of your money in a small-cap value index fund.

This approach will give you a piece of just about everything: US stocks, international stocks, US bonds, and international bonds. Plus a tilt toward small-cap value, the #1 performer in history.

Just remember, you can’t invest without first adopting the Millionaire Mindset.

Happy investing!