5 Best equities strategies from the last 94 years
5 best equities strategies from the last 94 years, Diversifying your portfolio is one of your most critical responsibilities as an investor. Find the best mix of assets to get “peace of mind and a piece of the action,” as I call it.
However, one size does not fit everyone. Some investors value tranquility over nearly everything else. Others appear to desire as much “activity” as possible.
My team at the Merriman Financial Education Foundation made a new tool in the spring of this year to help investors make better choices by comparing five simple equity strategies.
For each year from 1928 to 2021, you can see at a glance how each of the five strategies performed relative to one another, as well as their annual returns. The colored boxes make it simple to interpret a large amount of information on a single piece of paper or computer screen.
Here’s why this is important: In 1999, after the S&P 500 index SPX, -1.77 percent had increased by 17 percent over a 25-year period, many investors determined that this index alone was sufficient to reflect the benefits from this group of well-known and reputable companies.
Nonetheless, by that time, numerous academics were teaching (and I was preaching) the advantages of diversifying into different types of stocks (asset classes) with positive long-term returns — and which rose and fell at different times and rates than the S&P 500.
On the graph, there are green boxes for the S&P 500, which reflect large-cap blend equities, i.e., a mixture of primarily growth and some value stocks.
The pink boxes (labeled “US4F”) indicate a four-fund strategy that invests equally in the S&P 500, large-cap value stocks, small-cap mix stocks, and small-cap value stocks.
In a box in the lower right corner of the graphic, you can see that this combination had a significantly greater long-term compound annual growth rate than the S&P 500 (10.2%).
Perhaps the most intriguing of these five strategies (“US2F” and “orange”) is a combination of two very distinct asset classes: the S&P 500, which is dominated by stocks of very large companies with popular stocks, and small-cap value stocks, which represent small companies with relatively unknown and unpopular stocks.
In 67 of the 94 years included by this analysis, one of these two was the top performer and the other was the worst. However, when they were combined, the combination produced a far superior long-term return than the S&P 500 with significantly less volatility.
This is what happens when you spread your money around wisely: you have peace of mind and a piece of the action.
I would evaluate this (orange) two-fund plan as follows:
In numerous years, this has performed far better than normal.
This mixture rarely resembled the reported fluctuations in the “stock market.” In numerous years, its returns lagged behind those of the S&P 500.
Because small-cap value stocks do not typically move in lockstep with the S&P 500, investors seeking high long-term returns should consider this investment option.
Let’s examine the last four strategies in this chart.
The S&P 500 index (green) is the default investment choice for many investors, and it is superior to actively managed funds. Long-term results for the overall U.S. stock market index are comparable.
This index is characterized by large, well-known corporations with excellent management. This is how “the stock market” is typically described in the news. In 36 out of the 94 calendar years, this strategy outperformed the other four.
This index has exhibited the worst long-term performance among the four major U.S. asset classes. In 48 of 94 calendar years, this product performed the worst.
This is acceptable for investors ready to tolerate good (but not outstanding) long-term returns and who trust Warren Buffett’s advice for most investors (which differs from what he does with his own money).
A four-fund combination of U.S. asset classes (pink boxes) encompasses all significant segments of the U.S. stock market.
The long-term return is significantly higher than that of the S&P 500, with significantly less volatility.
This method has nearly never exhibited the best performance.
In conclusion, I believe this is an excellent option for those seeking a higher return than the S&P 500 with less volatility.
The two-fund value combination (orange boxes) of large-cap value and small-cap value has outperformed everything shown thus far over the long term.
Performance, plain and simple, utilizing the power of stocks you may purchase at a discount.
Poor: Value stocks fluctuate in popularity. In order to reap their long-term benefits, you must persevere through lengthy periods of underperformance.
This is a fantastic option for bold, risk-tolerant individuals who wish to mimic Warren Buffett’s approach to money management.
Lastly, small-cap value alone (“USSV” and blue) concentrates on the one asset class with the highest long-term performance.
A compound annual growth rate of 13.4 percent from 1928 to 2021 is favorable.
In 31 calendar years, or around one-third of the time, small-cap value stocks had the lowest performance.
As a stand-alone approach, I believe it is most suitable for investors who save actively during their early working years.
I believe there is something for everyone here. If I were compelled to make a blanket recommendation among these five strategies, I would choose the four-fund U.S. portfolio. I don’t believe investors are likely to make a major mistake with this portfolio (pink boxes).