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AAII Asset Allocation Models Asset Allocation Dispatches

Returns for Asset Class Groups: Large-Cap Stocks Rebound Back Into the Lead

The rebound in 2023 is very evident in the heat map of the calendar-year returns for the seven major asset class groups.

by Charles Rotblut | February 2024

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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Last year’s rebound is very evident in the updated “heat map” displayed below (Figure 1). This heat map shows the calendar-year returns for the seven asset class groups that comprise the AAII Asset Allocation Models. Each asset class group is ranked 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 (2014–2023)

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.

FIGURE 1. Annual Returns for Each Asset Class Group (2014–2023)

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 Admiral 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 Investor Class (VSIGX) and Vanguard Short-Term Treasury Admiral Shares (VFISX).

Source: Morningstar.

Large-cap stocks led all groups for the third time in five years. A small number of stocks were mostly responsible for the group’s leadership in 2023. As of the end of December 2023, the 10 largest stocks in the S&P 500 index accounted for 86% of the index’s return. Those same stocks also accounted for 32.1% of the S&P 500’s total market capitalization—the largest percentage since at least 1996 according to J.P. Morgan Asset Management.

Short-term bonds went from best to worst. After incurring the smallest loss in 2022, the asset class group realized the smallest gain in 2023. While the current high yields on short-term bonds and cash-like instruments have appeal, such instruments offer very little to no opportunity to profit from capital appreciation.

Small-cap stocks ranked second in 2023, and international stocks ranked third. Small-cap valuations relative to large-cap valuations are unusually low. International stocks, meanwhile, have underperformed domestic large-cap stocks for a longer-than-typical stretch.

While differences among asset class groups tend to revert toward their historical norms over time, predicting when this will happen is extremely difficult. Diversification offers the advantage of increasing the odds of being allocated to the right asset class group at the right time.

Longer periods of time smooth out the year-by-year fluctuations you see in the heat map. Over longer periods, stocks provide long-term growth of capital while bonds—particularly when held to maturity—provide preservation of capital. This difference allows them to complement each other within the context of a diversified portfolio.

Ultimately, your goals and tolerance for risk should drive your allocation decisions, not recent performance data or expectations of what will happen next.

Discussion

ROBERT A from NC posted over 2 years ago:

Greater regulation favors large companies over smaller ones. That may be a factor in their relative performances of late.


BARRY J from TX posted over 2 years ago:

Charles passed along this data from JPM and added modest overall observations. My Inner Geek, however, cannot insult a good pile of data by letting it go to waste. So, I put it in a spreadsheet and tortured it. That is what data is for. Piles of data are meaningless without analysis. Here are a few of the things that interested me. They may reconfirm some things you suspect are true or already think you know. Remember, according to the statistics gods, a 10-year sample is not a large enough sample to be “statistically significant” that you can make “statistically valid” inferences. #1 The 1-7 rank order of these 7 asset classes in 2014 returned to the same 1-7 rank order in 2023. Here it took 10 years to realign versus the historical average of 6-8 years.#2 This is also true for the order of the return data; it replicated its 7-1 order by overall and average returns in 2014 and again in 2023. #3 2022 was a lousier year than I thought. In 2022, the order of asset classes with the historically highest returns and largest losses reversed the order from 1-7 to 7 to 1. #4 Equities, the top 5 classes, had returns greater than 10% in 24 of the 40, 60% of the possible years. The 2 fixed income classes had zero (0) returns. #5 The overall average return for the 5 equity classes over these 10 years was 7.06% versus -6.36 for the 2 fixed income classes. Thus, the average “equity premium” spread over these 10 years was 13.42%. This is about twice the historical Ibbotson average dating from 1929. #6 The average returns over these 10 years (in 1-7 order) were equities (by cap) LARGE 16.8%, MID 13.3%, SMALL 9.7%, INTL 6.6%, EM 2.4%, and (for bonds) IMED -1.4% and ST -4.5%. #7 Intermediate bond returns were negative 7 of 10 years and short-term bonds 6 of 10 years over this period. #8 Had you allocated these 7 asset classes equally in a 60% equities/40 bonds portfolio, your average return would have been 6.69%. #9 If you had limited your portfolio to US equities ONLY, you would have earned average returns of 16.8%, 13.3%, and 9.7%. Had you allocated these 3 asset classes in 50%/25%/25% portfolio allocation, your average return would have been 14.16%. #10 From this comparison of equities and bond returns, it is reasonable to ask if the diversification bonds historically provide is worth the cost paid for it in loss of revenue. (This data unintentionally endorses the “just keep on buying” equities mantra of the AAI Communities Allocation Thread led by Robert Adams.) Although Charles passed on a No Trump bid, if equities were Spades, I bid 5 Spades since I have 3 Aces in the equities, ask for the 4 No Trump bidder to show Kings, and I am thinking Small Slam.


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