The second quarter of 2019 generated positive returns. Interest rates fell as the expectation for interest rate cuts in the future increased. Read below about why exposure to some asset classes can significantly change the expected returns of your portfolio.
Investors are presented with a wide range of choices in how to invest – including the critical choices of whether to own stocks or bonds and in what proportion. These choices are what we refer to as “asset class” choices. Each asset class has its unique characteristics – including expected return, expected risk, correlation with other asset classes, etc.
Stocks as an asset class can be subdivided into different asset classes – such as large or small, value or growth (both is “blend”), as well as International and emerging markets (with their respective subcategories) of small/large and value/growth, blend, etc.
Ultimately, the choice of asset classes is critical – over 90% of your return as an investor is driven by the choice of asset classes (how much and in what proportion to other asset classes). The academic data supporting asset class characteristics is extensive – it’s been carefully collected and researched for over 90 years. A brief synopsis: the clear outperforming asset class is US small cap value (SCV). Of 14 asset classes it has the highest average annual return. Even more impressive is that almost 46% of the time when compared to all other 14 asset classes it has the HIGHEST annual return over a ten-year horizon! (83% over a thirty-year horizon!) None of the other asset classes are even close. The downside – it’s more volatile than asset classes like large cap blend (S&P 500) and sometimes will under-perform for long periods (last ten years) compared to other lower returning asset classes.
Pillar carefully includes small cap value (SCV) in every client portfolio along with the mixture of other asset classes. Why? Because even small doses of SCV will help a portfolio generate better returns over time without raising risk when used judiciously for patient and highly educated investors.
Q2 2019 Market Review (PDF)