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

|Includes:QQQ, SPDR S&P 500 Trust ETF (SPY)

Since this is 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:

(click to enlarge)Click to enlarge

( 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, 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 over various asset classes - and for example slightly rebalance it every 6 or 12 months.

As for the need/urge to "play" in the markets: 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 stocks and following the market, reading annual reports and use risk-reward, compare risk-adjusted 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 (Mauboussin, 2012)

** 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 short entry.

Stocks: SPY, QQQ