Read ‘Annual returns for major asset classes’ — what it means for Canadian investors
As you might expect, volatile asset classes like emerging markets (EM, which are measured by the MSCI Emerging Markets Index) tend to generate both outsized gains and losses. Emerging markets have topped the chart in five of the past 15 years (2007, 2009, 2012, 2017 and 2020), but were also at the bottom in 2008 and 2011. Emerging markets’ biggest gain over this period was 52% in 2009, immediately after 41%. loss in 2008. That’s a story!
Standard Deviation Review of Major Asset Classes
Franklin Templeton’s latest line charts also include a second version titled “Risk is more predictable than returns.”
This graph states: “Higher returns often come with higher risks. That’s why it’s important to look beyond returns when choosing a potential investment. And it ranks asset classes from lowest risk to highest risk and here the results are remarkably consistent over almost the entire 15 year period between 2005 and 2021.
The lowest risk for each of the periods covered is that of Canadian bonds, with returns generally between 3% and 4% (a high of 4.77% from 2019 to 2021). And consistently, the riskiest stocks are emerging market stocks, which were listed as the riskiest asset class from 2005 to 2019, replaced only by Canadian stocks between 2018 and 2021.
Almost as consistently, the second least risky asset class was global bonds, while the second riskiest were international equities (MSCI EAFE index from 2010 to 2017) and Canadian equities (from 2005 to 2011).
Look outside the chart
This is all valuable information, but, alas, these charts seem to focus almost exclusively on the two major asset classes of stocks and bonds, precisely the two that are at the center of all these all-exchange-traded funds. in-one popular asset allocation. (ETFs) launched by Vanguard and soon to be matched by BMO, iShares, Horizons and a few others in Canada.
Even these seemingly cautious broad-based diversified investments are likely to post disappointing results once these charts update for 2022. When a classic 60/40 balanced fund, like Vanguard’s VBAL, is down 13% through 31 October (I know, because I own it), you know we’re going through a tough time, even for conservative investors.
For me, the disappointment is that the “Why Diversify” chart – like most asset allocation (AA) ETFs, for some reason – ignores alternative asset classes like gold or precious metals, real estate or real estate investment trusts (REITs), commodities, inflation-linked bonds and cryptocurrencies.