2018 Asset Class Returns: How Do They Stack Up?

July 18, 2018

As we look back on the first half of 2018, below are a few key takeaways:

  1. Small-cap U.S. stocks are now the top-performers. Small caps are represented by the Russell 2000 and reflect the current positive and favorable domestic business environment. With the constant buzz of a global "trade war" the Russell 2000 index has proven to outperform thus far at around 10%. Overall, small-caps are less impacted by global forces.
  2. Don't bet on the horse that won the last race. Last year we witnessed positive returns in both the EAFE (Europe, Australasia, and the Far East) and Emerging Market Indices. Year to date, these two indices have tumbled and are underperforming. They have slipped to the bottom of our chart. Immigration changes, political instability in certain regions, heavy debt, and talks of tarrifs plague the indices.
  3. Bonds have slowly dipped lower. As projected, with the rise in interest rates, and with more interest rate hikes expected on the horizon, bonds have fallen a bit lower into negative territory. Generally speaking, bonds have an inverse relationship with interest rates. With interest rates increase, bond values typically decline. Bonds also have an inverse relationship with the stock market, in that, when the stock market declines bonds have a tendency to look more attractive, thusly, investors migrate towards the safer, more stable nature of bonds.

One of the key conclusions that we draw when looking at how the stock and bond markets perform over time is the importance of diversifying one’s investment assets. No asset class stays at the top. There is a constant rotation in what is performing well during any given year. And we believe that the most prudent and likely way to generate desirable risk-adjusted returns is to maintain diversification across asset classes. Note that the darkest colored box you see on this chart represents a “Moderate Growth” style of investing. It diversifies across the various asset classes listed and historically can create a more consistent return.

Investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.