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Lessons Learned

There are three important lessons to be learned from understanding asset class performance.

  1. From Table 1, we note that each asset class has very different return and risk characteristics. When you build your portfolio, you should take these characteristics into account. While history is not a predictor of future asset class performance, it can tell us how specific asset classes have performed in the past. You can observe that if you want your portfolio to grow faster than taxes and inflation, you should likely consider making stocks a larger part of your portfolio.
  2. There is a positive relationship between risk and return. Generally, assuming you invest in portfolios of assets and not just single assets, there is a positive relationship between risk and return. As a general rule, the higher the return, the higher the risk. When you build your portfolio, you are not just trying to plan for a higher return, but a you should consider risk as well. Invest at a risk level you are comfortable with.
  3. While equities are volatile on a short-term basis (annually), over longer periods of time the bad periods are offset by good periods. If you have a sufficiently long time horizon, the bad periods (i.e., periods of negative returns) are generally offset by the good periods (i.e., periods of positive returns). The key is to invest long-term.


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