This week's edition of Barron's (January 7, 2019) has an interesting article discussing the fact for the 20 year period ending December 2018, it has been one of the worst periods for the market since the Great Depression with a 5.52% nominal compound annual growth rate for the S&P 500. According to DataTrek research, the average since 1928 has been 10.7%. We have been the unlucky generation to experience two significant market drawdowns in the last 20 years.
To mitigate our reliance on the equity market for returns, we turn to the theory behind diversification...exposure to multiple asset classes with a strategic allocation to fit your risk tolerance, risk capacity and goals. As an example, over the same 1998 - 2018 period discussed above, REITs at the asset class level outperformed US large cap by over 1.50%. If we shorten this to the period of 2008 - 2018, US large cap outperformed REITs by over 1%.
We don't know where the best returns lie in the future, so we use portfolio diversification software to design a strategic asset allocation in an attempt to increase the statistical odds that the portfolio will perform better from a risk/return profile. But markets are driven by investor behavior, not statistics, so diversification and the use of portfolio optimizing software is not a guaranty against losses or better returns. In our experience, clients who go through the process better understand these issues and have more resolve to stick with their long term plan and avoid the investor behaviors that can be detrimental to long term performance.
As always, we stand ready to assist you, your friends and family in understanding this complex world of investments and investment management.
Dave + Drew