Brian Shea, a fellow advisor in New Canaan, Connecticut, maintains a database that contains historical market return information on five asset classes. Those asset classes are: small company stocks, large company stocks, international stocks, intermediate term bonds and 30-day treasury bills. (I’ve added two other asset classes — gold and Missouri farmland). Return information dates to 1926 for each asset class except international stocks, which dates to 1966 when an international market index was first published.
Each year, Brian faithfully updates this robust spreadsheet and kindly shares it with other members of the Alliance of Comprehensive Planners, a non-profit group of like-minded fee-only advisors. Three of the most interesting takeaways from his dataset are shared in this article.
First, investors are rewarded for investing in stocks, but having a long investment horizon on money subject to market risk is critical. Over the last 50 years, small cap, large cap and international stocks have annually returned an average of 12.07 percent, 10.12 percent and 9.23 percent respectively. This is quite extraordinary. However, not every year is so rosy. The worst 5-year period for these same asset classes shows total returns of -47.97 percent, -11.23 percent and -21.47 percent. If investors will need to withdraw money from the market in the next 5 years, the risk they can afford to take with these assets should be carefully considered.
Second, adding bonds to a portfolio lowers the risk of losing money in a portfolio but doesn’t eliminate it entirely. A 100 percent stock portfolio divided into 60 percent large cap, 20 percent small cap and 20 percent international lost -38.2 percent in 2008, the worst year. That same year, a portfolio with 25 percent short-term government bonds and 25 percent intermediate-term government bonds with the remaining 50 percent allocated to stocks as before still lost -15.4 percent. In fact, a 50/50 portfolio of stocks and bonds still lost money on average every 5.1 years since 1926. By comparison, a 100 percent stock portfolio lost money on average every 3.5 years.
Third, it’s interesting to learn that gold and Missouri farmland have returned 4.57 percent and 4.53 percent respectively since 1926, a remarkably similar number. Both fall into the category of “hard assets” so perhaps this isn’t completely surprising. However, whereas stocks have returned near their historical averages over the last 35 years, gold and Missouri farmland have returned just 3.51% and 3.68 percent respectively. In other words, if either asset was purchased during market highs in the early 1980’s, long-term returns have consequently suffered.
Data also suggests investors who advocate owning gold because it is a good store of value may be correct – but only over the long term. Over the last 5 years, gold has returned an average of -5.86 percent annually, hardly a storage of value. Over the last 20 years though, gold has returned an average of 6.88 percent annually, far outpacing the rate of inflation at 2.14 percent.
The issue with purchasing gold and Missouri farmland is that they tend to be purchased in large singular purchases instead of smaller purchases over many years as investors typically do with stocks and bonds. Gold is often purchased as a reaction to other negative events in the marketplace — likely the worst time to purchase it.
On the other hand, Missouri farmland may not be acquired because of negative marketplace events, but peripheral circumstances such as low crop prices, rising interest rates or changing farm subsidies can all affect the price of farm ground. Someone who purchased Missouri “dirt” in 1980 had to wait 15 years before that ground was continually worth more than they paid for it, highlighting once again that patience is always a virtue when it comes to investing.
Tim Sullivan is the owner of Clarity Financial LLC, a fee-only advisory firm in Columbia, a CFP practitioner and member of the National Association of Personal Financial Advisors and has earned the Enrolled Agent designation from the IRS.
This article provided by NewsEdge.