Before I show you the 20-year annualized returns by asset class between 1999 – 2018, I want you to guess the following four things:
1) Of the following asset classes, the S&P 500, a 60/40 stock/bond portfolio, Bonds, a 40/60 stock/bond portfolio, REITs, Gold, Oil, EAFE (Europe, Asia, Far East), national real estate, which performed best?
2) What was the annualized return for the best performing asset class +/-0.5%?
3) What was the annualized return for the worst performing asset class +/- 0.5%?
4) What was the annualized return for the average active investor +/- 0.2%?
If you can guess two out of the four correctly, I’ll give you a gold star and might even take your child’s SAT or ACT exam for you.
If you only get one out of four right, you need to go run five miles immediately. If you get zero right, then you need to run five miles, do 100 sit-ups, and 100 push-ups.
There’s no way any of you are getting four out of four right.
Now that we have a deal, let’s take a look at the results to see how reality compares with your biased beliefs. Here are the annualized returns by asset class between 1999-2018.
Annualized Returns By Asset Class Between 1999 – 2018
Below are the results compiled by J.P. Morgan, one of the largest traditional asset managers in the world that charge clients 1.15% – 1.45% of assets under management, based on $1 – $10 million.
Asset managers like J.P. Morgan are the reason why digital wealth advisors like Betterment, were created during the last financial crisis. People wanted to pay lower fees and weren’t satisfied with active management results.
As you can see from the results, REITs is the #1 performer with a 9.9% annualized return. I bet less than 20% of you guessed this one right.
The S&P 500 only returned 5.6% a year between 1999 – 2018. I think most of you would have guessed a higher return. On a relative basis, Bonds, at 4.5%, doesn’t seem too shabby given the lower volatility and risk.
Gold is a real surprise at 7.7% since gold doesn’t produce any income and whenever gold is mentioned, it’s usually in a negative light unless you’re a gangster.
Meanwhile, Homes returned the worst at only 3.4%. The national home price index generally tracks close to inflation (2.2% in this time period). Therefore, a 1.2% outperformance is not bad. Further, we’re not including leverage, only sales price.
REITs Is The Best Perform Asset class
What’s most interesting to me about this chart is how REITs have outperformed Homes by 6.5% for 20 years. This goes to show that professional real estate managers can add tremendous value.
The outperformance also partially explains why experienced individuals who know how to bargain, remodel, expand, and predict demographic changes often prefer real estate as well.
Finally, it’s no surprise to me that the average active investor has only returned 1.9% a year during this time period. Trading in and out of investments is a losing proposition long term due to timing errors and fees. Figuring out when to buy is hard enough. Having to figure out when to sell and then get back in consistently is impossible.
The inability to consistently outperform the market is the reason why the vast majority of us should stick to a proper asset allocation model based on our risk tolerance and our goals in life.
Our core tax-advantaged retirement portfolio(s) should be mostly left alone. I’m talking about our 401(k), IRA, Roth IRA, SEP-IRA, 403(b), and so forth.
For our after-tax investments, it’s worth adjusting our strategies based on a purpose e.g. getting more conservative if buying a house within the next 12 months.
See: How To Invest Your Down Payment
Why I Chose 1999 As The Starting Point
In addition to the fact that J.P. Morgan had already crunched the numbers for me, 1999 as a starting point is significant for me because it coincides with my graduation from college and when I started to aggressively invest my savings.
I actually started investing money during my sophomore year in 1996, but I only had about a $2,500 portfolio at the time so it was insignificant. Hooray for making $4/hour at McDonald’s though to learn about work ethic!
Given my vintage year is 1999, my outlook on various asset classes is shaped by the performance of these asset classes during most of my working career.
From 1999-2000, we had a tremendous internet stock bubble followed by a 2.5-year decline. Then we had a nice 5-year run in the S&P 500 followed by another 2-year collapse.
A New Bull Market That’s Great For Annualized Returns
Now we’ve had a nice 12-year run that has surpassed the previous peak by almost 150%. Therefore, readers have to forgive me for not overweighting stocks at this point in time.
Given my working career has only been limited to living in New York City and San Francisco, I have personally witnessed closer to a 6% annualized growth in property from 1999 – 2018.
6% is not much greater than the stock market’s 5.6% annualized return. However, once you add leverage, 6% becomes a significant amount. We’re talking 12% – 30% annualized returns on a 50% – 80% loan-to-value ratio.
When I calculate my compound annualized net worth growth rate since 1999, the number is between 12% – 14%, depending on how I value some of my assets. This is fine since my annual net worth growth target has always been at least 10%.
However, I would attribute more than 50% of my net worth growth to aggressive savings and building a business rather than to returns. In other words, what you do may matter more than you think.
Lower Your Annualized Returns By Asset Class Expectations
One of my main goals of this article is for readers to keep your return expectations reasonable over the next 10-20 years. If you do so, your risk exposure will likely be more appropriate. You’ll also likely work harder to build your net worth through action.
The second goal of this article is to compare your overall net worth growth to your various investments of choice and see how they stack up. You should try to figure out how much of your net worth growth was due to savings versus returns.
Finally, I want everybody to recognize their biases. I’m biased towards real estate because real estate has performed best for me since 1999. Whereas some of you will be biased towards stocks or other asset classes because they have performed best for you since getting your first real job.
Past performance is no guarantee of future performance. It is likely we will experience some performance leadership changes in the future and will have to adapt accordingly.
Related: The Best Asset Class Performers From 2001 – 2020
How We Plan To Invest Our Money
For our tax-advantaged investments, including our son’s 529 plan, I plan on leaving them alone. We’ve still got between 16-20 years before we want to access the funds.
For our after-tax investments, I’m reducing exposure to stocks, increasing exposure to cash and short-term treasuries. I’m also diversifying our real estate exposure across non-coastal cities through speciality REITs and real estate crowdfunding. Finally, I’m constantly looking for ocean view fixers in San Francisco.
I’m sure I’ll be kicking myself 10 years from now if I don’t buy at least one more ocean view fixer today. I just love the combo of identifying high growth potential investments and boosting returns through rehabbing.
Diversify Your Investments Into Real Estate
As we saw from the annualized returns by asset class, REITs have performed best. However, REITs are also very volatile during a stock market downturn. Therefore, I’d much rather prefer investing in private eREITS, like the ones offered by Fundrise.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
In addition to Fundrise, I also recommend CrowdStreet. CrowdStreet focuses on individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. Growth rates tend to be faster as well due to positive demographic trends.
I’ve personally invested $810,000 in real estate crowdfunding across 18 different deals. It feels great to diversify, earn income 100% passively, and capitalize on the rising real estate market!
Every long term investors core portfolio should include total stock and total bond then sprinkle in refits, tips,intl and em
Not too difficult
Excellent post and certainly one of my favorites. I recently picked up some REITs and diversified into bonds as well, but never guessed even holding a simple bond portfolio yields a clear 4.5 without much volatility. Another striking point is that at least in this term, the whole 60/40 etc balancing may not be worth the stress as simply just buying the S&P alone.
Sam – wanted your thoughts on if more of the gains in real estate, oil, and gold were more due to real performance or the multiple rounds of QE – and also if you don’t mind providing what you currently do for these.
it think the bet with gold and risk assets such as these could go either way since largely our system is more stable after the implementation of financial reform post ’08. I have read with REITs they currently hold certain favorable tax law structures whereby it is possible to write off and or carry losses, therefore never really losing much total value. On gold I’d rather hold small holdings through GLD or physical. Oil, I like to play the swings and these cyclical downturns are some of my most favorite
The notion that printing massive amounts of money via QE is bearish for gold is, frankly, a joke. If anything, with yields approaching zero percent and massive money printing is very bullish for gold.
When bond yields were 10%, there was a decent argument against gold returning 0%. When bond yields are 0%, well…that gold is starting to look attractive. At least you can guarantee the central bank can’t double the supply of it overnight like they can with dollars.
Under current monetary circumstances, gold is more bullish than ever. And when you consider how increasingly regulated (both officially and unofficially) stocks are, and the fact that so many companies are basically zombies running on prior productivity leveraged to the hilt for share buybacks, well, gold also starts to look attractive.
IMO, the best investments right now are local business franchises that you can manage the finances of yourself, followed by leveraged rental real estate, followed by gold. If you don’t have the ability to exercise direct control over it, my level of trust is…quite low.
anyone have a suggestion for the best way to get gold exposure? many of these websites that sell precious metals seem scammy.
Gold stock. It pays approximately 2% to hold this position. Your thoughts.
Physical. If you don’t hold it, you don’t own it. comparegoldprices.com links you to a bunch of sites. I use jmbullion and provident metals, personally.
What I got from this article is, don’t believe the daily talk. Even today, most people talk about how great stock investments/returns are. I’ve mostly been in personally managed multi-family real estate at a highly leveraged 7.25% rate on my loan, and wishing I was in anything else. However, my returns, after tax advantages, have been much higher than any of the asset classes mentioned.
What I got from this article is, select your own asset allocation and run with it. A term I learned in the military was SWAG, scientific wild ass guess. That is what I figure I have done by choosing my allocation and running with it. Everything has its good and bad times. Times when you can sell for whatever you want to ask, and times when you can’t give it away.
I won’t be making any changes based on this information. I chose a well thought out allocation and still believe in it.