Naturally we talk a lot about volatility here on the blog and I do consider myself an alternative strategy investor, but the traditional asset classes do also play an important role in both our fund through the VTS Tactical Balanced Strategy as well as just the economy in general so let’s update our running 10 year comparison chart.
10 year comparison of major asset classes:
You can see the red line representing bonds has been quite consistent as usual, but the other three definitely were not. Gold performed incredibly well for several years after the financial crisis but has subsequently given a lot of those gains back. Real estate and stocks on the other hand had a dreadful experience through the financial crisis but have come back fairly strong in the last 8 years of this bull market.
I find it interesting that in 2013 through 2015 they all converged quite closely. Now for the past 100 years the average recession cycle in the United States is about 6 years which does roughly line up with that period.
So if a bull market happens to be a shorter one then stocks and real estate would likely underperform over that period. If it’s a longer bull market like the one we are currently in (now the 2nd longest in history) stocks and real estate have enough time to catch and overtake the other assets. This is one of many reasons why diversification helps, because every bull and bear market cycle is of a different length and character.
We also talk a lot about risk management. About moving past the headline number of annualized return and focusing more on the risk adjusted return. If you recall the Sharpe Ratio was part 1 of my 5 part risk adjusted return series (click here to watch the video)
Clearly stocks and real estate have done better as far as absolute performance, but it’s actually Bonds that have given the best risk adjusted performance when we factor in maximum drawdown and the standard deviation of the day to day performance.
So I know it sometimes feels like stocks will never go down again, but I assure you at some point there will be another recession. Maybe this year, maybe not for another 5 years, but eventually it’ll happen. When it does it’ll be interesting to see how these asset classes perform.
We know stocks will go down and likely real estate right along with them. The point of interest for me is going to be, what will happen to bonds and gold?
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