Nobel laureate Eugene Fama was once asked at an investment conference about the value of making portfolio decisions based on a decade worth of results. His rather succinct response: "Ten years is noise." 

Still, we keep getting questions from investors about whether they can glean any clues about how to make asset-allocation decisions now by looking at the past decade's winners. According to such logic, if growth-styled stocks prevailed in the past 10 years — or large caps did better than small caps — shouldn't we simply keep riding those same horses down the stretch?

Our own research and experience managing client portfolios over the years has led IFA to come to the same conclusion as Fama and other leading academics. From a purely evidence-based and statistical perspective, IFA's portfolio management and research group finds that trying to design an asset-allocation plan around how different types of assets performed in the past decade just doesn't provide much more than background "noise."

To help illustrate how misleading it can be to slice benchmark results into 10-year increments, we've put together a series of graphs. Each compares risk and return numbers for a variety of IFA indexes covering different asset classes. Instead of reviewing just one or two of these periods, however, we present the past five decades. 

The 2010s

Many investors focus on the 500 largest U.S. companies (by market capitalization size). Indeed, the large-cap dominated IFA SP 500 Index of domestic stocks fared relatively well in this decade. (See figure 1.) However, benchmarks providing exposure to U.S. growth-styled and technology stocks (as represented by the IFA NSDQ index) did even better. During the 2010s, large- and small-cap growth domestic equities might've appeared the place to be, so to speak.

Figure 1

The 2000s

In the decade immediately preceding the 2010s, IFA indexes tracking U.S. small- and large-cap value stocks were top performers in the 2000s. (See Figure 2 below.) By comparison, large growth lagged the blended IFA SP 500 Index. Meanwhile, in the 2000s sister IFA indexes capturing U.S. small growth underperformed the blended domestic small-cap benchmark. Technology stocks finished as relative underperformers in the decade. 

Figure 2

The '90s

The tech-heavy IFA NSDQ index rose to the top during the '90s. (See Figure 3 below.) Another high-flying equity asset class was domestic large growth stocks. At the same time, U.S. small growth equities underperformed in the 1990s. 

Figure 3

The '80s

In this period, underweighting a portfolio of domestic growth stocks would've provided a relatively short-term benefit. (See Figure 4 below.) The 1980s, per representative IFA U.S. indexes, were years in which value stocks — both in small- and large-cap categories — were notable outperformers. 

Figure 4

The '70s

If you started to put together a diversified and passively managed portfolio based on this 10-year period, U.S. small-cap value stocks would've seemed to be a winning bet. (See Figure 5 below.) During this decade, large-cap value and the blended IFA domestic small-cap category also outperformed. At the other end of the spectrum, IFA's U.S. large- and small-cap growth equity indexes were relative laggards. 

Figure 5

To condense such findings, consider Figure 6 below. It pulls together all five divergent decades to show how a diversified index-based portfolio actually would've played out. Of note is how important global diversification — in particular, exposure to international small-cap stocks — proved to be after the dust settled over the entire 50-year period. Tilting to smaller company stocks and value-oriented fare also clearly wound up to be savvy portfolio decisions in terms of allocating between different asset classes.    

Figure 6

So, which decade turned out to best predict expected returns? The answer is quite simple: None.

As you can see, outcomes in different parts of the markets can be highly variable when looking at what's happened in the past decade. That's true whether you're looking at asset styles or market capitalization sizes. Figure 7 (below) gives us another way to look at how random asset-class returns appear when slicing-and-dicing results over the past decades.

A case in point: The IFA International Small-Cap Value Index had a monster '80s, then fell to dead last in the '90s. Even a more staid U.S. Large Company Index has proved tough to predict — in the 2000s, it was a cellar dweller. In the next decade, it landed at the top of the heap. 

Figure 7

The evidence provided here reinforces how detrimental trying to cherry pick performance based on a past decade's results is to the asset-allocation planning process. Instead, IFA's wealth advisors strongly recommend that clients make sure to cover all of their bases by holding a broad range of investable asset classes in their portfolios. Our research shows that investors can most effectively increase their odds of capturing greater market returns by sticking to a globally diversified and passively managed asset-allocation plan over a lifetime of building wealth.

To provide more information about how investors can utilize such a five decades analysis, IFA Founder and CEO Mark Hebner has created the video shown below. 

 


This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, service, or considered to be tax advice. There are no guarantees investment strategies will be successful. Investing involves risks, including possible loss of principal. This is intended to be informational in nature and should not be construed as tax advice. IFA Taxes is a division of Index Fund Advisors, Inc. For more information about Index Fund Advisors, Inc., please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.


About Index Fund Advisors

Index Fund Advisors, Inc. (IFA) is a fee-only advisory and wealth management firm that provides risk-appropriate, returns-optimized, globally-diversified and tax-managed investment strategies with a fiduciary standard of care.

Founded in 1999, IFA is a Registered Investment Adviser with the U.S. Securities and Exchange Commission that provides investment advice to individuals, trusts, corporations, non-profits, and public and private institutions. Based in Irvine, California, IFA manages individual and institutional accounts, including IRA, 401(k), 403(b), profit sharing, pensions, endowments and all other investment accounts. IFA also facilitates IRA rollovers from 401(k)s and 403(b)s.

Learn more about the value of IFA, or Become a Client. To determine your risk capacity, take the Risk Capacity Survey.

SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.

About the Author

MurrayColeman

Murray Coleman - Financial Writer - Index Fund Advisors

Murray is a financial writer at Index Fund Advisors. Prior to joining IFA, he worked as a funds reporter for The Wall Street Journal, The Financial Times, Barron's and MarketWatch.

Murray Coleman
Written By Murray Coleman

Financial Writer - Index Fund Advisors

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