We have recently received several questions from our clients regarding the 10-year performance of some of the asset classes that we utilize, and what that performance suggests about future investment trends. The first table below ranks nine asset classes from best performer to worst performer over the 10-year period ending June 30, 2009. Given the results from the last 10 years, it is tempting to ask why one would want to own anything other than commodities and emerging market equities. The dismal performance of U.S. large core and value equities might bring into question the need for large cap U.S. equity exposure in a portfolio, and may even encourage some to question the wisdom of owning equities at all.

However, if we look at the same table from 10 years ago (1989 – 1999), it is easy to see the flaw in this approach. Applying the same method to the 10-year period ending June 30, 1999, we would have come up with very different conclusions. We would have been questioning why anyone would own anything other than the S&P 500 (remember “Buy the best and forget the rest?”) We would have surmised that the higher volatility in emerging markets only leads to lower returns and that investing in commodities or bonds is simply foolish.
 

The moral of the story is clear: It is unwise to draw conclusions about the future direction of markets from the data of the recent past. The human brain is programmed to seek patterns and to project those patterns into the future. However, capital markets do not follow patterns; they never have, and they never will.  The future relative performance of the stock markets (or of asset classes, sectors or individual stocks) cannot be predicted from the past.  This is precisely why Heritage diversifies into a wide array of asset classes, and also why we do not attempt to time the movements of the markets. As always, we welcome your questions, comments and suggestions for further topics.

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