Updated February 2021

KEY ASSET CLASS RETURNS FOR 2000-2020

Most investors are prone to a "recency effect", the tendency to look at recent investment returns and choose investments based on recent short term performance rather than longer term time samples.  Behavioral finance research has found that the typical investor has a time window looking back about 6 to 24 months and recent returns would probably encompass the last 5 years.  To keep investors involved the financial press comes up with everchanging narratives that purport to explain daily market moves and usually focus on what portfolio changes a smart investor should make today or soon based on interpretations of the latest information and price trends.  This fuels rapid portfolio turnover, management fees and industry profits and gave rise to a continuing narrative throughout the mainstream financial press in 2020, one which has been repeated since 2009.  The US is on the road to economic recovery and a full recovery is coming soon, US economic growth is strong and improving and the U.S. Federal Reserve will maintain stability and growth in the US economy and investment markets.  However, market narratives can change instantly and the Fed historically has been unable to stop major market downtrends.

Countless factors influence market returns in the short run.  After the largest Christmas eve Dow decline in history in 2018 the market rallied about 30% due primarily to an expected US tariff deal with China.  As of early 2021 the relationship between China and the US has deteriorated to the worst its ever been.  As I write this in early 2021 US equity prices are hitting almost daily record highs though economic growth numbers are significantly subpar and even the financial press hasn't clearly come up with a clear and certain reason for record high prices.  US large and smallcap growth stocks and particularly a small number of popular tech stocks like Facebook, Apple, NetFlix, Amazon, Tesla and Google, the so-called FANGMAN stocks, have led an equity price rally and markets for several years despite breathtaking p/e's and very poor value.  There's nothing like a bubble.  However, historical data from DFA/Ibbotson and Dimson et. al./Credit Suisse covering 100+ years indicates that US large cap growth stocks like the FANGMAN stocks can be expected to return a very large 3% less annually than a globally diversified DFA-style multiple asset class portfolio.  It's worth noting that the S&P 500 represents a little under half of the US GDP yet grew in price by 375% from 2000 through 2020 while GDP growth underpining the US economy grew by a not so spectacular 25%, a complete disconnection between equity prices and economic growth.  This outsized S&P 500 gain was primarily driven by very rapid and record US money supply creation from the Fed at 10x the economy in 2020, a very high level of stock buybacks, and by short stampedes run by speculators.  Record high leverage also boosted equities not to mention interest rates well below the rate of inflation so borrowers were paid to borrow and much of the borrowed money found its way into markets.

  TOTAL RETURNS:  JANUARY 2000-DECEMBER 2020

*The data above includes dividend reinvestment for equities and interest reinvestment for bonds and is not inflation adjusted.

THE NARRATIVES THE NUMBERS TELL

The table above presents trailing 21 year returns for major asset categories through end-2020.  A DFA "balanced" 100% equity portfolio and the Evanson Asset Management® (EAM) 10x10% global diversified DFA mix are very similar with the EAM10x10% equity model weighting value stocks, small caps and foreign equities a little higher.  DFA's balanced portfolio outperformed EAM's since DFA weights US equities heavier and US equities moved up much faster than foreign equities in the recent past.  Across several decades US stocks have significantly underperformed foreign stocks.  Both DFA and EAM portfolios tilt towards value and small cap stocks as well as include large and small growth stocks.  Both DFA and EAM allocation mixes clearly demonstrate that superior returns to the three big US indexes are available when international developed markets and emerging markets and small caps and value stocks are included in equity portfolio allocations.

Despite being largely ignored by the financial press gold has given far superior returns to the all major equity indexes for 21 years from 2000 through 2020.  Though the US Federal Reserve continues to promote the narrative that it can control inflation the purchasing power of the US dollar has declined by a not insignificant 98% since the Fed was created in 1913.  This is everywhere and always what money supply inflation exceeding economic growth does.  Equities, fixed income and real estate are not included in the CPI, as noted above.  They have gone up far faster than the CPI.  There is no historical evidence that any inflation is beneficial to national economies or the average citizen in them long-term.  The US Federal Reserve appears to have created a 2% inflation target with no historical explanation and little evidence supporting it.  Asset inflation is most beneficial to large asset holders and it's worth noting that Jerome Powell, head of the Fed in early 2021, has an estimated net worth around $80 million to $100 million though he only makes $400,000 per year as Fed head.  Government statistical data show that 80% of American families have seen their net worth and income in inflation adjusted terms decline since 2009 and only the top 1% have seen strong gains.

The data in the table above clearly show that investors should avoid the recency effect in their thinking and pay attention to long-term returns in multiple asset classes, not just current narratives from Wall Street on what is supposedly occurring in markets.  Other articles on our website examine investment returns in more detail.  We know from extensive research that equity asset classes move in or out of favor over short and over longer time frames and we discuss this elsewhere on our website in "Stocks for the Long Run".  We know from extensive research that passive and index investing at low cost has the highest probability of delivering the best net long-term returns to investors and that sales narratives created by the mainstream financial industry are unlikely to help investors beat the markets.