Investing 101: Asset Class Returns Since 2000 (And A Refresher On Active Vs. Passive Investing)

Includes: QQQ, SPY
by: Tales From The Future


It's hard to get it even close to "right" in terms of asset allocation over time. Compare various asset class returns since 2000. Most fund managers underperformed.

Active Investing: Consider the time value for stockpicking, reading company reports and filings and following the markets in general. Always use risk-adjusted ratios (Sharpe or Sortino ratio).

Active versus Passive Investing: A balanced, passive core portfolio constructed using low-cost ETFs with simple rebalancing every 6-12 months is probably a better choice for most retail investors.

Originally published on Aug. 22, 2014

Since this was my Instablog entry number 101, it feels like a good time to return to some investment basics. Investing 101.

Below is a chart with various annual asset class returns since the year 2000:

(Chart Source)

There's also an Asset Allocation Portfolio (see white boxes, label AA) with a blended return for each year (the exact portfolio composition is shown on the lower right side of the chart).

The only two classes missing in my opinion: I wish the authors added metals/currencies (like gold or a basket of foreign currencies) and commodities (like oil) as two separate classes, especially because they historically have a low correlation to stocks and bonds.

Summary: It's very hard to get it even close to "right" in terms of asset allocation every year. A diversified portfolio is probably the safer choice for most long-term investors.

The proposed AA portfolio (I would add some metals/foreign currencies and commodities to the mix as discussed above) can be constructed very easily nowadays using various low-cost ETFs.

The nice thing about low-cost ETFs is that you don't have to be wealthy to create such a balanced portfolio using various asset classes - and for example slightly rebalance it every 6 or 12 months.

As for the need/urge to "play" in the markets beyond your core portfolio: A small (that's important) portion of assets can still be used to pick stocks you believe in - that is if you actually have:

- the time to follow the news and SEC filings etc. from these companies closely

- and/or feel like you can time the market cycles better than the average investor.

Trust me, that is more difficult than it sounds over a long period of time*. A balanced portfolio constructed with low-cost ETFs is probably the better choice for most investors.

Simply compare the returns of your "active" stock picks versus a balanced portfolio constructed with the proposed 40% stocks and 60% bonds/REITs/commodity portions after a few years (it is important to measure returns over more than just a single market cycle period).

But make sure you don't just compare the net returns - include a value for your time hunting individual stocks, following the market and reading company reports and filings. Last but not least, use risk-reward, compare risk-adjusted return ratios**.


* A single winning stock pick doesn't count. I can recommend this good book once again on the subject: The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing

** Search for Sharpe ratio or Sortino ratio and similar benchmarks and use them alongside the "pure" net returns to measure both risk and return. Explaining these ratios would be beyond the purpose of this article.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.