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What Are You Aiming For?


By Matthew J. Carvalho, Director of Investment Research, Loring Ward

When you look at the returns of a variety of asset classes over the past 15 years, it’s hard to find any meaningful patterns. The chart here shows the returns on 11 different asset classes since 2002, and it’s quickly evident that what was the star of last year rarely shines the brightest the following year.

When planning for investment goals 10, 20, 30 years down the road, most investors would prefer a higher level of stability than the highs and lows of any one asset class, such as the positive 79% or negative 50% that you see on this chart from Emerging Markets Value over this time.

While Emerging Markets Value was the best performer over this period, it came at a high cost in terms of volatility, with a standard deviation (which measures the ups and downs of an investment) of 22.1%. While you saw a great annualized return overall during these 15 years, you had to persevere through six negative years, three of which saw losses greater than 15%.

How can you keep your portfolio from experiencing large swings like that year to year? It’s simple—diversification. Over the last 15 years a blend of 65% stocks and 35% bonds was never the top performer but it was also never the bottom performer. At the end of the period it posted an annualized return of 6.8%.

That lines up quite closely to the S&P 500, which averaged a gain of 7.0% over the same time frame and has seen tremendous returns since 2009. Over this period, the 65%/35% blend of stocks and bonds had a 10.0% standard deviation while the S&P 500 had a much higher 14.3%. This meant the diversified portfolio saw less erraticism, especially in a year like 2008, where it fell by just 24% compared to a 37% drop on the S&P or a 50% drop in Emerging Markets Value.

Many investors keep trying to outguess the market, but time and again the investment world shows us we can’t predict what will occur next.

With a diversified portfolio, you won’t be the single best performer in any period, but the tighter range of returns may give you fewer reasons to worry about poor returns from a single asset class. If you’re in or nearing retirement and are currently taking money out of a portfolio, a smaller range of possible annual returns can help increase your odds of successfully meeting your goals over the long term.