Best investment?

http://awealthofcommonsense.com/2016/03/updating-my-favorite-performance-chart/

It’s usually easy to establish what the best asset class of the past year has been. But where should you have been investing your money ten years ago?
Your best bet would have been a call option on a relatively unknown company that subsequently – possibly due to a takeover – increased fourfold in value. Or a turbo on a 30 year government bond. Or a credit default swap on a Greek company that is now defunct. But today’s graph isn’t about investments of this kind: rather than showing which stock or which derivative has generated the best returns, it looks at the wider market – such as commodities, small caps and real estate. Ranked from low to high. The first ten columns show the individual years, and the last column answers the question I asked in the introduction: which asset class has generated the best returns over the last ten years? Do note however that the overview is from a US site, which means that much of the data you see relates to the US market or the returns have been converted into US dollars.

It’s a simple overview, but it yields a lot of information. For example, it not only reveals which the best-performing asset class was but also the returns you would have generated for each asset class. This clearly shows that there can be significant differences from one year to the next. It is also clear that by and large 2008 was the worst investment year – you would have achieved returns of -26.6% had you invested an equal weight in all 10 asset classes. Nevertheless you would have achieved better returns if you’d invested in the top performer that year, rather than that last year’s best asset class: bonds generated a net return of 7.6% in 2008, while in 2015 real estate took pole position with a maximum gain of 2.2%. The considerable difference between 2008 and 2015 relates of course to the bottom of the list: in 2008 maximum losses (-48.9% for emerging markets) were much higher than in 2015 (-28.2% for commodities).

While we’re on the subject of commodities, the table also clearly shows how poorly these markets have performed in recent years. For five consecutive years, investments they posted negative returns – a performance unsurpassed by any other asset class in this period. Something else you notice is their remarkably stable performance – bringing up the rear in four out of five years. Had it not been for the marginally poorer performance of emerging markets in 2011, this asset class would have come last in all five years.

Another slightly less noticeable, but nonetheless noteworthy observation is the performance of cash (blue). It is the only asset class not to have generated returns in any year (in the US, at least), thus living up to its reputation of a ‘risk-free’ investment. However, if you look at returns on cash over the years, it also immediately becomes clear that this characteristic is delivering diminishing returns: while in 2006 you would have earned 4.9%, since 2010 this figure has remained steadfast at 0.1%. Needless to say cash does not score very highly in the overview of returns for the past ten years.

Long term
Finally, this brings me back to the question: what was the best investment over the past ten years? The answer: stocks. The differences within the equity markets aren’t especially great, but with an average annual return of 8.4%, small caps delivered the best returns within these markets, with the bigger names coming in at 7.2%. What you also notice is that for US stock investors, it was barely worth investing beyond US borders, as international stocks and investments in emerging markets yielded returns of ‘a mere’ 2.8%. This is partly due to lagging non-US markets, and also to the fact that the dollar appreciated over this period.

It is also worth mentioning that this list is far from stable: had you looked at the table in 2013 (for 2004-2013), emerging markets would have stood out from the rest with an average return of no less than 15%. So, as you see, even over a relatively long period of time the rankings are far from stable and fluctuations in average returns can be considerable.

It will of course be very interesting to see how this table looks in ten years’ time.

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