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While the past is not the future, it still helps to know what happened in the past and how various assets performed against themselves and against each other; and also what extremes of behavior past performance may suggest.

The table in the figure is for twelve key bond and stock asset categories for the 10 years ending December 31, 2011:

  • Aggregate bonds
  • Intermediate municipal bonds
  • Intermediate Treasury bonds
  • Intermediate investment grade corporate bonds
  • Balanced 40/60, bond/stock portfolio
  • Large-cap stocks
  • Mid-cap stocks
  • Small-cap stocks
  • High yield dividend stocks
  • Equity REITs
  • European stocks
  • Emerging market stocks

There are certainly other categories of interest, but these cover the vast majority of listed security assets of most retail investors.

The table provides total return and volatility (standard deviation) data for 3 years, 5 years, and 10 years.

The data was taken from the Vanguard mutual funds for each category(because they have the necessary length of operations). Good or pretty good proxy ETF symbols for each category are listed under the mutual fund symbol.

(Click image to enlarge)

How Good or Bad Might It Be? For each category and each time period a hypothetical best and worst case projection is presented . The range between the best and worst cases may be reasonable to bracket the future, exclusive of "fat tail" events.

Because approximately 95% of expected events occur within 2 standard deviations of the mean, it is at least interesting to add and subtract 2 standard deviations from the mean return to bracket what might be the range of good and bad returns that could occur in a subsequent year.

Of course, stocks don't behave in perfect "normal" distributions, but the whole volatility concept based on standard deviations uses the working assumption of a normal curve -- not correct, but better than nothing -- and not in recognition of fat tails like we saw in 2008.

Compare Worst Case History With Worst Case Projections:
The bottom three lines of the table present the worst 3-month, 1-year and 3-year periods in the last 10 years.

For the most part, the actual worst case drawdowns occurred within the downside range predicted by subtracting 2 standard deviations from the mean return.

Being Realistic While Not Living In The Past:
On the one hand, we think investors have to put the past trauma behind them and not live in constant fear frozen in cash positions, it is also important to be aware of the range of possible return outcomes that price behavior suggests is reasonably possible.

This sort of data can be helpful as an overlay on other factor such as interest rate change and stock earnings growth expectations.

There are variety of optimistic and pessimistic predictions out there among the experts and pundits. If they fall outside of +/- 1 standard deviation (about 67% probability range) or +/- 2 standard deviations (about 95% probability range), then you might be best served by looking at them a bit harder before taking them from your favorite gurus as highly probable.

Disclosure: QVM has long positions in CSJ, MDY, IWM and VWO in some managed accounts as of the creation date of this article (February 1, 2012).

Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.