Return of Investment Assets since 1972
The purpose of this article is to help me understand where we are in the macroeconomic cycle, and to provide some insight into how different asset classes fared since 1972.
I’ll be using the portfolio backtest asset class allocation tool at:
https://www.portfoliovisualizer.com/backtest-asset-class-allocation
to assess how different asset classes performed over a 50-year time-frame. I would have preferred a longer timescale, particularly because we’d have a clearer idea of how different assets performed during the 1960’s-70’s since it has parallels to the macroeconomics today. Also… a lot has changed since 1971.
See:
https://wtfhappenedin1971.com
The parameters of the backtest are:
· $100,000 starting amount
· $2500 is deposited monthly
· Returns are inflation adjusted
· Rebalancing annually
I needed to adjust a few plots and measurements due to lack of data. I added these comments in the footnotes under each table and made note in the post.
Note that this data is plotted on a logarithmic scale, which makes volatility in the market today look less spooky. Just know that the SP500 is currently down 21.6% since the start of 2022.
First we’ll start with a comparison of only US large cap equities. I am including the table at the beginning, with commentary and figures below for easy interpretation.
Table 1. Return of equities since 1972
Note: Europe, pacific, and emerging markets started in 1996, initial dollar amount adjusted to 2.5 million dollars.
This includes US large cap, US large cap value, US large cap growth. You can clearly see that large cap value (red) outperformed until 2021, when large cap growth spiked significantly higher due to asset inflation due to the government's response to the pandemic. Now that monetary conditions are tightening, large cap growth dropped and narrowly outperformed value over the given time frame.
Figure 1. Performance of US large cap, US large cap value, US large cap growth over 50 years.
Next, we’ll look at US mid cap, US mid cap value, US mid cap growth. ALL mid-cap value handily outperformed all large caps. Mid cap growth was comparable in performance to the large caps.
Figure 2. Performance of US mid cap, US mid cap value, US mid cap growth over 50 years.
And now small caps. The trend is more interesting. Small cap value had 2x as high returns as large caps! And the mid-caps which underperformed. This somewhat makes sense because it’s hard for a larger stalwart to gain in value over a productive small company.
Figure 3. Performance of US small cap, US small cap value, US small cap growth over 50 years.
The performance of international equities was compared for Europe, the pacific, and emerging markets. There are time constraints, so this data only goes back to 1995. I adjusted the initial portfolio value to $2.5 million so the final returns are comparable to the US indices which had more time to appreciate.
Figure 4. Performance of European, pacific, and emerging market equities over 50 years.
European stocks did best of the three, but all of them underperformed any of the US sub-indices. It’s interesting to see the correlation in stock volatility globally – we are all connected now.
Now it’s time to compare alternative assets.
We’ll start with US T-bonds of long, short, and intermediate term (note: time starts at 1978. I adjusted the starting amount of money to 200,000 to compensate for the gap.) All of them make beautiful logarithmic curves due to the nature of a bond. Very satisfying to see. But not satisfying to hold. All US equities out-performed bonds. All equities did, in fact, except for pacific equities vs. long-term Tbills. It was hard to be a bond baron over the last 50 years.
Table 2. Return of other assets since 1972
Note: REIT, gold, and commodities prices are started at 2007 with 7 million dollars
Figure 5. Performance of intermediate, long, and short-term Tbills.
I’m not going to bother with international or corporate bonds.
Now we’ll do physical assets – gold, REITS, and commodities. The date for commities only goes back to 2007 so we need to adjust for returns between 1972 – 2006. I assumed a starting value of $7,000,000 in line with what you’d have if you were only in US large cap equities for the same timeframe.
Commodities had a brief period of outperformance during the 2008 financial crash, before they rapidly declined for about a decade and a half. Commodities are spiking today, due to inflationary pressures. Notice a trend in when commodities spike and when they underperformed. REITs had decent return after the initial housing market crash, but gold outperformed in the end.
This chart highlights the cyclicality in physical assets.
Commodities will have periods of boom and bust, where the boom could handily outperform all other assets and bust causes the most pain. It’s interesting to note that the price of commodities should ideally trend lower as we make technological advances which (ideally) make them more cheaply and efficiently.
Gold has a 6000-year history as money. It went through a 10-year bear market between 2012-2022, despite the inflation of the monetary supply. One could argue BTC affected gold prices. But I disagree – the gold market is much larger than the crypto market.
Figure 6. Performance of REITs, Gold, and Commodities since 2007. I wish I had more data.
We now established that small cap value handily outperformed all other equities over the last 50 years, and gold is the best performing alternative asset. Now the question is – what happens if we mix the two assets? Below is a plot with 75/25, 50/50, and 25/75 gold/small cap value.
Table 3. Return of small cap value mixed with gold at varied ratios since 1972
Figure 7. Performance of mixed portfolios with 25/50/75% gold with the remaining amount in small cap value.
We see several trends:
· Decrease in market correlation with an increase in fraction of gold
· The max drawdown is reduced from -56% to -25% with a 50% allocation to gold, too high or too low allocation leads to -38% drawdown
· Increasing fraction of gold decreases the performance of the portfolio.
· The final return is best for small cap value on its own
This was a helpful exercise for me. I hope it was for you, too.
- Depropagation
Disclaimer: Due to the financial nature of this post, I need to disclose that I hold a diversified portfolio of assets consisting of US and global stocks, bonds, precious metals, and commodities. This is not financial advice.