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Asset Allocation Dispatches

Asset Class Group Performance: Large Caps Lead in 2021

The importance of diversification becomes clear when looking at a heat-map ranking of the asset class groups by their performance for each of the last 10 years.

by Charles Rotblut | February 2022

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

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One of the arguments in favor of diversification is that it increases the odds of being allocated to the right asset class group at the right time.

Last year, being allocated to large-cap stocks paid handsomely. Large-cap stocks delivered a 28.7% gain. This return bested the performance of the other asset class groups comprising the AAII Asset Allocation Models.

Intermediate-term bonds and short-term bonds fell in value last year, declining by 2.6% and 0.9%, respectively. This was not surprising given stronger inflation and expectations for the Federal Reserve to both end its bond buying program and raise interest rates.

Emerging markets stocks also had a rough year with just a 0.9% gain. A combination of the pandemic, high sovereign debt and the strong U.S. dollar all weighed on the performance of such stocks.

Figure 1 shows the returns for the asset class groups used in the AAII Asset Allocation models. This “heat map” ranks each asset class group by its calendar-year performance in descending order from left to right. The groups are color-coded so you can track their relative performance over time.

FIGURE 1. Annual Returns for Each Asset Class Group (2012–2021)

The figure below shows the annual returns for each of the asset class groups used in the AAII Asset Allocation Models. The asset class groups are sorted in descending order of return (left to right) for each calendar year. As you can see, the best-performing asset class frequently changed from year to year, demonstrating the benefits of diversification.

 

Prior to December 2020, the following mutual funds were used as proxies for calculating historical performance: Vanguard 500 Index Investor Class (VFINX), BNY Melon Mid Cap Index Investor Class (PESPX), Vanguard Small Cap Index Investor Class (NAESX), Schwab International Index, Schwab International Index (SWISX) and Vanguard Emerging Markets, Stock Index Investor Class (VEIEX), Vanguard Intermediate-Term Treasury Investor Class (VFITX) and Vanguard Short-Term Treasury Investor Class (VFISX).

As of December 2020, the following funds are used to calculate historical performance: Vanguard 500 Index Admiral Shares (VFIAX), Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX), Vanguard Small Cap Index Admiral Shares (VSMAX), Vanguard Developed Markets Index Fund Admiral Shares (VTMGX), Vanguard Emerging Markets Stock Index Admiral Shares (VEMAX), Vanguard Intermediate-Term Treasury Admiral Class (VSIGX) and Vanguard Short-Term Treasury Investor Shares (VFISX).

Source: Morningstar.

As you look at the chart, one thing should jump out—the lack of a consistent leader. While large-cap stocks have had a nice run over recent years, they have not always been the leader. Six different asset class groups have held the top spot over the past seven years: intermediate-term bonds (2015), mid-cap stocks (2016), emerging markets stocks (2017), short-term bonds (2018), large-cap stocks (2019 and 2021) and small-cap stocks (2020).

While there is always a temptation to make predictions, returns often end up being different than expectations. Diversification reduces the risk of being wrong by increasing the odds of being allocated to the right asset class group at the right time.

Keep in mind that your goals and tolerance for risk should drive your allocation decisions, not recent performance data or expectations of what will happen next. Stocks provide long-term growth of capital while bonds—particularly when held to maturity—provide preservation of capital.

Hear More on This Topic

Individual Investor Show: Improve Your Allocation by Gauging Risk and Ranking Asset Returns


Discussion

JAMES H from MN posted over 4 years ago:

If one's goal is "above-average" performance, then the chart shows pretty conclusively that, at least for the last ten years, stocks (especially domestic stocks and especially Large-Caps) are almost always above the median and bonds are almost always below. Emerging market stocks are a more mixed bag, but more often below the median. Based on this limited time frame, and if investing for anything more than short-term, the simple message would appear to be: "Buy Domestic Large-Cap Stocks". It would be interesting to see the trends for longer time periods.


BARRY J from TX posted over 4 years ago:

Since the "modern portfolio management" process was invented, financial advisors have recommended investors (1) diversify their allocations between equities and fixed income funds in proportion to their goals, lifestyle, and risk tolerances, and (2) use a mix of funds to tailor exposure to volatility because different asset classes have low correlations, i.e., fixed income funds perform better when equities perform worse. The figure above supports that theory. For example, in 2015 and 2018, fixed income funds performed better than equities while in the other 8 of 10 years equities trounced fixed income. The 7 funds in each row could be used to create a portfolio tailored to an investor's risk profile. Too bad the article did not build several model portfolios to show how their comparative annual performance demonstrates how diversity pays off.


Patricia C from TN posted over 4 years ago:

In your February 22 AAII-J write-up on the annual returns for different asset classes from 2012 to 2021, you left out two important facts for serious long-term investors. First, the large-cap stocks have by far the best 10-year performance, as follows from the data in your Fig. 1: Asset class, 10-year return annualized: Large-cap stocks 14.2%, Medium-cap stocks 11.3%, Small-cap stocks 11.6%, Internat. stocks 6.7%, Emerging stocks 4.3%, Short bonds 0.9%, Medium bonds 2.2%. In addition, if you had picked the best asset class beforehand each year, your average annualized return would have been 14.6%, which is barely better than the large-cap stocks. So stick with large-cap stocks, be worry-free, and relax.


DAVID F from TX posted over 4 years ago:

I highly prefer a diversified portfolio, yet I tend to agree with James H from MN above, that of the seven asset classes portrayed in this article, three tend to demonstrate stronger performance, coming in the "top-three race-horse" finishes in the 10-years: Large-Cap Stocks - 9 Small-Cap Stocks - 7 Mid-Cap Stocks - 5 Emerging Markets Stocks - 3 Intermediate-Bonds - 2 Short-Term Bonds - 2 International-Stocks - 2 I enjoyed your article.


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