A Visual Representation of Asset Returns, 2013-2022
Two years ago, when I last wrote about the table of returns across asset categories, I observed, “the consistently steady performance of the US stock market.” It appears that things have not changed despite the poor performance of American stocks last year.
As I did in early 2021, I am using the information provided by investment analyst Norm Rothery, who maintains the Stingy Investor website. Following this link will take you to the latest iteration of his Periodic Table of Annual Returns for Canadians. Another site you may be interested in is found on The Measure of a Plan website, which presents its own Investment Returns by Asset Class, using “real” returns after inflation is factored in.
The Periodic Table of Annual Returns for Canadians
I invite you to go to Rothery’s site if you would like to arrange the data by time frame and assets. To make my presentation a little easier to view, I’ve removed some of the asset classes from consideration and used a different colour palate.
The Wilshire 5000 is a total US stock market index and, as you can see, it is the top performer for six out of the 10 years presented. Here are the rest of the returns by asset class, complete with colour coding and ranked top to bottom by performance:
If you prefer a line chart, you may find this more appealing. I find it a bit “busy,” but I think that busyness helpfully conveys the message that stock market returns can be quite volatile over a relatively short period like a decade.
Addressing the fixed-income side first, you can see that the medium-blue line for the 3-month T-bills hovers just above 0.00% and is quite flat.
You can see that the darker orange line representing Short Canadian Bonds is also relatively flat but as with everything but cash (3-month T-bills) in 2022, dips below zero returns.
The grey line shows the pattern of returns for All Canadian Bonds. This category is a little more volatile than the first two, as one should expect in a category that includes the full range of bonds from short-term to long-term. There were three negative years: 2013, 2021, and 2022.
Shifting to the equity side, let’s begin with the TSX Composite. There is definitely more volatility reflected in the light orange line.
The Wilshire 5000, a US stock index that, like a few others, represents the overall returns of the entire investable US-domiciled stock market, identified by the lightest blue line, has the highest returns overall, and was the top-performing index for six of the ten years measured, but was also a poor performer in 2022.
The green line represents the MSCI EAFE index. EAFE stands for Europe, Australasia, and the Far East and covers the developed markets outside of Canada and the US. It has been a good performer over the last decade, but not as good as the US stock market.
Finally, we have the navy blue line, which reflects the returns from the stock markets of the so-called Emerging Markets, developing economies, one might say, versus more mature so-called developed economies. Considered the most volatile of investment categories, this should suggest that the expected returns would be the greatest, but that has not been the case over the last 10 years.
Below is the colour-key coding of the table. I have also added ticker symbols for some relevant Exchange-Traded Funds (ETFs). These are not recommendations, they may not be available to you, and should be investigated thoroughly before any purchase decisions are made.
Given the zigzagging nature of the returns from the various categories of investments, this suggests that an investor is wise to diversify across the categories. While the results might suggest that US investments are the way to go, I lean toward diversifying across all, or at least most of, these categories, perhaps weighting some a little more strongly than others. So, pick an ETF (or an equivalent mutual fund) from each of the categories, balance them against each other according to reasonable criteria, and you will be on your way.
Constructing a Globally Diversified Portfolio
In Rothery’s original table, he presents 12 investment categories. I have narrowed it down to seven, and that may or may not be right for you. You may want to narrow it down to as few as four: Canadian Fixed Income, Canadian Equity, US Equity, and International Equity. Or you may want to simplify your investment strategy even further by investing in one of the asset allocation ETFs that are produced by Vanguard, iShares, and BMO to name the three biggest. If you put the pieces together yourself, you can set the balance as you see fit. However, that does make you responsible for rebalancing. If you go with one of the asset allocation ETFs, you can choose the Fixed Income / Equity allocation that suits you best and then leave the rebalancing to the ETF manager.
What Balance Should You Aim For?
The right balance depends on several factors. One of the most important is your own tolerance for the volatility, or risk, shown in the charts above. For investment advisors, this is an important part of their responsibility to “know your client” (KYC), and at the very least, a questionnaire will be put to you that you should discuss. If you are self-directed, you can find risk-tolerance questionnaires online. It’s not just the psychological aspect, however. There is also a need/requirement factor that should be considered. Someone who has already amassed relatively substantial wealth, or who has a rock-solid, inflation-adjusted pension plan may need to take very little risk at all, while someone who will need to fund their retirement entirely on their own may need to take more risk to reach the asset goal they feel they need. Most of us probably fall somewhere in between. Which one are you?
Since rebalancing means selling out of your better-performing assets and buying into your poorly-performing assets, some argue that this is counterproductive to the goal of getting better returns. However, allowing that allocation to drift over time means your portfolio risk is changing while your risk tolerance may not be. Since, over the long run, stocks usually do better than bonds, you are gradually losing the protective quality of the latter, which generally tend to zig when stocks zag. That did NOT happen in 2022, to be clear. Another rationale for rebalancing regularly is the “buy low, sell high” mantra of investing. Sticking to a systematic rebalancing strategy forces you to obey the buy low, sell high mandate. In the long run, you will be more likely to obtain your expected return while lowering your expected risk.
This is the 188th blog post for Russ Writes, first published on 2023-03-13
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.
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