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How do different asset classes behave over time? - DFSIN

How do different asset classes behave over time?

Not only did 2020 give investors quite a run for their money, it also highlighted the importance of the long term as part of an investment strategy. This infographic takes a look at the asset classes that fared best – over both the short and the long term.

February 23, 2021

There are many asset classes that individuals can invest in: Canadian stocks, U.S. stocks, bonds, guaranteed investment certificates, silver, gold, etc. Here’s an overview of how six of them have performed.

 

Overall, investors holding a high percentage of cash did worst in 2020, while those who owned U.S. stocks saw solid returns on those assets. Annual returns, after inflation, were as follows: U.S. large cap stocks: 17.0%. International stocks from developed countries: 8.9%. Canadian bonds: 7.0%. Canadian stocks: 4.3%. International bonds: 3.3%. Cash: -0.7%.
Since each asset class reacts differently to market cycles and events, it’s not unusual for the best performer in one year to be among the worst a year later. This periodic table reveals, for example, that in 2016, Canadian stocks outperformed the other asset classes. But in 2018, they ranked fifth out of six and in 2020, fourth out of six.
Despite the very changeable relative returns from year to year, some asset classes seem to offer higher long-term growth potential. For the period from 1985 to 2020, the average annual return after inflation for the various asset classes was as follows: U.S. large cap stocks: 8.7%. Canadian stocks: 6.1%. International stocks from developed countries: 6.0%. Canadian bonds: 5.4%. International bonds: 3.6%. Cash: 0.7%.
The asset classes that perform best over the long term are also those with the highest volatility in the short term. On the other hand, this volatility diminishes greatly over time. This graph shows that for each asset class, the spread between the highest and lowest returns decreases as more years are included in the calculation. Over a 15-year period, almost no asset class would have a negative average annual return.
Diversification among the various asset classes is generally considered to be an efficient way of aiming for superior long-term returns while protecting the portfolio from short-term volatility within any given class. This means being “almost” right all the time, instead of running the risk of being completely wrong at any given point. This circle graph illustrates the composition of a balanced portfolio containing Canadian stocks, U.S. large cap stocks, Canadian bonds and a small amount of cash. For the period from 1950 to 2019, the average annual return before inflation for this portfolio would have been 9.5%.

 

Infographic: How do different asset classes behave over time?

Overall, investors holding a high percentage of cash did worst in 2020, while those who owned U.S. stocks saw solid returns on those assets. Annual returns, after inflation, were as follows: U.S. large cap stocks: 17.0%. International stocks from developed countries: 8.9%. Canadian bonds: 7.0%. Canadian stocks: 4.3%. International bonds: 3.3%. Cash: -0.7%.

Since each asset class reacts differently to market cycles and events, it’s not unusual for the best performer in one year to be among the worst a year later. This periodic table reveals, for example, that in 2016, Canadian stocks outperformed the other asset classes. But in 2018, they ranked fifth out of six and in 2020, fourth out of six.

Despite the very changeable relative returns from year to year, some asset classes seem to offer higher long-term growth potential. For the period from 1985 to 2020, the average annual return after inflation for the various asset classes was as follows: U.S. large cap stocks: 8.7%. Canadian stocks: 6.1%. International stocks from developed countries: 6.0%. Canadian bonds: 5.4%. International bonds: 3.6%. Cash: 0.7%.

The asset classes that perform best over the long term are also those with the highest volatility in the short term. On the other hand, this volatility diminishes greatly over time. This graph shows that for each asset class, the spread between the highest and lowest returns decreases as more years are included in the calculation. Over a 15-year period, almost no asset class would have a negative average annual return.

Diversification among the various asset classes is generally considered to be an efficient way of aiming for superior long-term returns while protecting the portfolio from short-term volatility within any given class. This means being “almost” right all the time, instead of running the risk of being completely wrong at any given point. This circle graph illustrates the composition of a balanced portfolio containing Canadian stocks, U.S. large cap stocks, Canadian bonds and a small amount of cash. For the period from 1950 to 2019, the average annual return before inflation for this portfolio would have been 9.5%.

The following sources were used to prepare this article: 
Actualis, “Which asset class performs best?” 

Novel Investor, “Annual Asset Class Returns.” 

Portfolio Visualizer, “Asset Class Returns.” 

Stingy Investor, “Periodic Table of Annual Returns for Canadians.” 

The Measure of a Plan, “Investment Returns by Asset Class (1985 to 2020).” 

TaxTips.ca, “Historical Investment Returns on Stocks, Bonds, T-Bills.”