The new year often is a time to reflect on past years performance and future investments. During my reading over the holidays, I stumbled across an interesting chart at http://researchpuzzle.com/. I encourage readers to look at the site and specifically the chart at http://rp-pix.com/.
At the end of the year is is natural to look at the past year's performance. The chart referenced above looks at not one year's performance, but the past seven year's performance. Arguably, seven years is a reasonable approximation of a business cycle. The chart shows the seven years total returns on the ten year US bond (TLT), investment grade bonds (lqd), and the S&P 500(SPY). Interestingly, these three very different investments have about the same seven year return. However, they got there via very different paths. Stocks plunged and recovered, the 10 year surged and then pulled back, while investment grade bonds was a more consistent performer.
As with any bit of information, there are a lot of "conclusions" that can be drawn from one chart. Some things that crossed my mind when looking at this data include:
- I assume this is somewhat of an anomaly. I did not look at any other seven year periods, but if this is the norm, then there is no point to trying to make asset allocation decisions. More specifically it would seem surprising to me if in this low interest rate environment, bonds could match the performance of equities over the next 7 years. That does not make me a bull on the stock market, but rather a bear on the bond market.
- Rebalancing would have worked better. I did not do any math, but just from looking at the chart it is clear that buying the dips, selling the rips would improve performance. Some might call that timing the market, I prefer to think of it as aggressive rebalancing. Perhaps we should all make a new years resolution to more diligently/aggressively rebalance our assets.
- and...there is more than one way to get to the same place. Not shown on the graph, but any traditional asset allocation across these different assets would also yield a similar return. It also means that there might be other ways to match/beat the results/risks of a traditional portfolio allocation over a business cycle via the use of other instruments. One of those other instruments is options. In 2014, CCI plans to continue to discuss option based strategies to provide alternative approaches to augment traditional asset allocations