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Markets in a Minute

Asset Class Risk and Return Over the Last Decade (2010-2019)

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Asset Class Risk and Return

Asset Class Risk and Return

This Markets in a Minute Chart is available as a poster.

The Importance of Asset Classes

Asset allocation is one of the most important decisions an investor can make. In fact, studies have found that the percentage of each asset type held in a portfolio is a bigger contributor to returns than individual security selection.

However, it’s important for investors to select asset classes that align with their personal risk tolerance—which can differ based on how long they plan to hold an investment—and their targeted returns. This Markets in a Minute chart from New York Life Investments shows asset class risk and return data from 2010-2019 to highlight their different profiles.

Asset Class Risk and Return

To measure risk and return, we took annualized return and standard deviation data over the last ten years.

Annualized returns show what an investor would have earned over a timeframe if returns were compounded. It is useful because an investment’s value is dependent on the gains or losses experienced in prior time periods. For example, an investment that lost half of its value in the previous year would need to see a 100% return to break even.

Standard deviation indicates risk by measuring the amount of variation among a set of values. For example, equities have historically seen a wide range in returns, meaning they are more volatile and carry more risk. On the other hand, treasuries have typically seen a smaller range in returns, illustrating lower volatility levels.

Below is the risk and return for select asset classes from 2010-2019, organized from lowest return to highest return.

Asset ClassAnnualized ReturnAnnualized Standard Deviation
Global Commodities-5.38%16.60%
Emerging Markets Equity-0.89%16.95%
Treasury Coupons0.73%0.81%
Investment Grade Bonds3.17%2.92%
Hedge Funds4.05%5.70%
Corporate Bonds5.55%5.26%
Global Listed Private Equity5.59%18.63%
1-5yr High Yield Bonds6.71%1.00%
Global Equity6.75%12.50%
Global Equity - ESG Leaders6.87%12.03%
Taxable Municipal Bonds7.20%7.33%
Real Estate Investment Trusts8.44%11.03%
U.S. Mid Cap Equity11.00%13.60%
U.S. Large Cap Equity11.22%11.39%
Dividend-Paying Equity11.81%10.24%
U.S. Small Cap Equity11.87%14.46%

Note: See the bottom of the graphic for the specific indexes used.

Global commodities saw the lowest return over the last 10 years. Plummeting oil prices, and an equities bull market that left little demand for safe haven assets like precious metals, likely contributed to the asset class’ underperformance.

Backed by the U.S. federal government, Treasury coupons had the lowest volatility but also saw a relatively low return of 0.73%. In contrast, 1-5 year high yield bonds generated a return of 6.71% with only slightly more risk.

With the exception of emerging market equity, all selected equities had higher risk and relatively higher historical returns. Among the stocks shown, dividend-paying equity saw the highest returns relative to their risk level.

Building a Portfolio

As they consider asset class risk and return, investors should remember that historical performance does not indicate future results. In addition, the above data is somewhat limited in that it only shows performance during the recent bull market—and returns can vary in different stages of the market cycle. For example, commodities go through multi-decade periods of price ascent and decline known as super cycles.

However, historical information may help investors gauge the asset classes that are best suited to their personal goals. Whether an investor needs more stability to help save for a near-term vacation, or investments with higher return potential for retirement savings, they can build a portfolio tailored to their needs.

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Markets in a Minute

Buy the Dip, Buy the Rise, or Follow a Plan: Which Had the Best Return?

Investors may want to buy the dip when values drop or buy the rise when values climb. We compare these strategies with simply following a plan.

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Buy the Dip

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Buy the Dip, Buy the Rise, or Follow a Plan?

As performance trends come and go, investors may wonder whether they should adjust their portfolios accordingly. When prices drop, should they buy the dip in anticipation of prices going back up? Conversely, when prices rise, should they buy the rise in case the climb continues?

In this Markets in a Minute from New York Life Investments, we compare these scenarios with following a financial plan to see which one has delivered better returns.

A Tale of Three Portfolios

To evaluate these strategies, we compared the historical performance of three hypothetical portfolios:

  • Buy the dip: 100% of the portfolio was invested in the worst-performing asset class from the prior year.
  • Buy the rise: 100% of the portfolio was invested in the best-performing asset class from the prior year.
  • Follow a plan: A balanced portfolio of 60% U.S. large cap stocks and 40% U.S. investment grade bonds for the entire duration.

We considered 13 asset classes to determine the best and worst-performing assets in each year.

EquitiesFixed IncomeAlternatives
U.S. Large Cap StocksU.S. Taxable Municipal BondsGold
U.S. Small Cap StocksU.S. Investment Grade BondsEquity Real Estate Investment Trusts
Developed Market StocksU.S. High Yield BondsHedge Funds
Emerging Market StocksForeign BondsGlobal Commodities
Cash (U.S. Treasuries)

Four were within the broad category of equities, five were under the fixed income umbrella, and four were alternative investments.

Portfolio Values Over Time

We assumed all three portfolios had the same starting value of $10,000 as of January 1, 2011. Here’s how the year-end values of the portfolios would have changed over the last decade.

 Buy the DipBuy the RiseFollow a Plan
2011$10,007$10,893$10,433
2012$11,890$12,076$11,541
2013$11,896$12,421$13,689
2014$11,911$13,137$15,109
2015$7,997$13,509$15,301
2016$8,906$14,674$16,488
2017$8,979$16,616$18,814
2018$9,142$14,368$18,386
2019$10,754$14,685$22,360
2020$10,812$17,387$25,414

The buy the dip portfolio climbed steeply in 2012. Emerging market stocks, the worst-performing asset class in 2011, rebounded the following year with an annual return of 19%. Unfortunately, the buy the dip portfolio saw its value drop significantly in 2015. Global commodities had the worst return two years in a row, returning -33% in 2014 and 2015. Ultimately, the value of the buy the dip portfolio ended close to where it started, with total gains of just $812.

On the other hand, the buy the rise portfolio saw its worst annual performance in 2018. Emerging market stocks had returned an impressive 36% in 2017, but saw losses the following year. The buy the rise portfolio had its best return in 2020, when U.S. large cap stocks continued their upward climb from the year before. By the end of 2020, the buy the dip portfolio saw gains of over $7,000.

Finally, the balanced follow a plan portfolio experienced a small drop in 2018 when U.S. large cap stocks declined. However, it climbed the following two years due to a recovery in U.S. large cap stocks, which was the top-performing asset class in 2019. In the end, the balanced portfolio more than doubled its original value—the best performance of the three portfolios we analyzed.

Risk and Return

Of course, return is only one side of the equation. To properly evaluate all three strategies, investors can consider both risk and return.

Below, we look at how risk and return stacked up for each portfolio over the 10 year period.

 Buy the DipBuy the RiseFollow a Plan
Cumulative Return8%74%154%
Min Annual Return-33%-14%-2%
Median Annual Return1%7%11%
Max Annual Return19%18%22%
Standard Deviation14%9%7%

Standard deviation based on annual returns.

Not only did the buy the dip strategy have the lowest cumulative return, it also had the highest risk. For instance, this portfolio experienced the biggest one-year decline of -33%, and had the highest standard deviation of 14%.

In the middle of the pack, the buy the rise portfolio’s worst drawdown was -14% and it had a standard deviation of 9%. Notably, its median annual return of 7% was much higher than that of the buy the dip portfolio.

Lastly, the follow a plan portfolio performed well on all fronts. Compared to the other two portfolios, it had the highest cumulative return and the lowest risk. Over the 10 year period, its worst annual performance was a decline of just -2%.

Buy the Dip: More Effort & More Risk

Notably, there are lots of variables that could affect the results of these strategies.

  • Time period: Are there general market conditions at play? For example, U.S. large cap stocks had a bull market for most of the period we studied, boosting the return of the balanced portfolio.
  • Types of securities: Is the portfolio investing in entire asset classes, or specific companies?
  • Short-term or medium-term movements: Is the portfolio tracking daily dips and rises, or annual dips and rises?

However, based on this set of data, buy the dip and buy the rise strategies have historically had lower returns and higher risk than a balanced portfolio. If the market doesn’t move in the way the investor predicts, this can result in large drops in the portfolio. It also requires more effort to track these trends, and could result in higher fees from more frequent trading.

In contrast, following a balanced portfolio has historically resulted in lower risk and higher returns. By sticking to a plan, investors are also much more likely to be aligned with where they are on the investor lifecycle. This means their investment choices match up with their goals and risk tolerance.

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Markets in a Minute

Wall Street vs Main Street: The Stock Market is Not the Economy

To give context to the Wall Street vs Main Street debate, we compare S&P 500 returns and U.S. GDP growth since 1980.

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Wall Street vs Main Street

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Wall Street vs Main Street

In 2020, the stock market and the economy had a very public break up. The Wall Street vs Main Street divide—the gap between America’s financial markets and the economy—was growing. By the end of the year, the S&P 500 Index closed at a record high. In contrast, 20 million Americans remained unemployed, up from 2 million at the start of the year.

Was 2020 an outlier, or does the performance of the stock market typically diverge from the economy? In this Markets in a Minute chart from New York Life Investments, we show U.S. economic growth and stock market performance over the last four decades, to see how closely the two relate.

GDP Growth and S&P 500 Returns

Here’s how annual GDP growth and S&P 500 Index returns stack up from 1980 to the second quarter of 2021. Both metrics are net of inflation.

YearReal GDP GrowthReal S&P 500 Returns
1980-0.3%13.9%
19812.5%-18.3%
1982-1.8%10.8%
19834.6%13.4%
19847.2%-2.5%
19854.2%23.0%
19863.5%12.9%
19873.5%-2.2%
19884.2%7.9%
19893.7%22.4%
19901.9%-12.4%
1991-0.1%23.4%
19923.5%1.4%
19932.8%4.4%
19944.0%-4.2%
19952.7%31.4%
19963.8%17.2%
19974.4%29.3%
19984.5%25.1%
19994.8%16.6%
20004.1%-13.5%
20011.0%-14.6%
20021.7%-26.0%
20032.9%24.5%
20043.8%5.8%
20053.5%-0.7%
20062.9%11.4%
20071.9%-0.6%
2008-0.1%-39.2%
2009-2.5%21.6%
20102.6%11.1%
20111.6%-3.1%
20122.2%11.6%
20131.8%28.3%
20142.5%10.9%
20153.1%-1.4%
20161.7%7.3%
20172.3%17.2%
20183.0%-8.1%
20192.2%26.8%
2020-3.5%14.9%
Q1 20211.5%4.5%
Q2 20211.6%5.8%

Note: For Q1 and Q2 2021, real GDP growth and inflation rates are quarterly rates and are seasonally adjusted.

More often than not, GDP growth and S&P 500 Index returns have both been positive. The late ‘90s saw particularly strong economic activity and stock performance. According to the White House, economic growth was bolstered by cutting the deficit, modernizing job training, and increasing exports. Meanwhile, increasing investor confidence and the growing tech bubble led to annual stock market returns that exceeded 20%.

In the selected timeframe, only 2008 saw a decline in both the stock market and the economy. This was, of course, caused by the Global Financial Crisis. Banks lent out subprime mortgages, or mortgages to people with impaired credit ratings. These mortgages were then pooled together and repackaged into investments such as mortgage-backed securities (MBS). When interest rates rose and home prices collapsed, this led to mortgage defaults and financial institution bankruptcies as many MBS investments became worthless.

Moving in Opposite Directions

What about when the Wall Street vs Main Street divide grows?

Historically, it has been more common to see positive GDP growth and negative stock performance. For example, real GDP grew by a whopping 7% in 1984 due to “Reaganomics”, such as tax cuts and anti-inflation monetary policy. However, the stock market declined as rising treasury yields of up to 14% made fixed income investments more attractive than equities.

On the other hand, in five of the six years with negative GDP growth, there have been positive stock returns. The most recent example of this is 2020. Real GDP declined by 3.5%, while the S&P 500 returned almost 15% net of inflation.

The Stock Market is not the Economy

There are a number of reasons why the stock market may not necessarily reflect what is happening in the economy.

  • The stock market reflects long-term views. A stock’s price factors in what investors think a company will earn in the future. If investors are confident in the likelihood of an economic recovery, stock prices will likely rise. In contrast, GDP growth is a hard measure of current activity.
  • Sector weightings in the stock market do not reflect their contributions to GDP. The stock market remained resilient in 2020 largely because technology, media, and telecom (TMT) stocks performed well. Despite making up 35% of the market cap of the largest 1,000 U.S. stocks, these companies only account for 8% of U.S. GDP. In contrast, hard-hit companies such as restaurants and gyms generate lots of jobs and contribute materially to GDP. However, many of these businesses accounted for a small portion of the stock market or are not even publicly listed.
  • Fiscal policy lags behind monetary policy. The U.S. Federal Reserve (Fed) can act quickly. For instance, the Fed bought $1.7 trillion of Treasury securities between mid-March and June 2020 to stabilize financial markets. On the other hand, fiscal support requires legislative approvals. The U.S. government initially provided large-scale economic stimulus through the CARES Act in March 2020, but further relief packages were stalled due to political disagreements.

While many factors are at play, the above can help explain the Wall Street vs Main Street divide.

Wall Street vs Main Street: Together and Apart

Over the last 41 years, the economy and the stock market have moved in opposite directions almost as often as they have moved in the same direction. Here’s a summary of their movements from 1980-2020.

 # of Years
Stock Growth, GDP Growth22
Stock Decline, GDP Growth13
Stock Growth, GDP Decline5
Stock Decline, GDP Decline1

Since 1980, these time periods of differing performance have never lasted more than three consecutive years. In fact, one economist described the stock market and the unemployment rate as two people walking down the street, tethered by a rope.

”When the rope is slack, they move apart. But they can never get too far away from each other.”
—Roger Farmer, University of Warwick economist

After their public breakup in 2020, the Wall Street vs Main Street divide appears to have healed. In the first two quarters of 2021, both the stock market and the economy saw growth. Perhaps it’s easiest to sum up their relationship in two words: it’s complicated.

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