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Nov 15 2018

Asset Allocation: As Bad As It Gets

  • Nov 15, 2018

As global central banks have tightened the noose during 2018, it isn't just stocks that have suffered. No major asset class has done well and, in most respects, the opportunity-set available to asset allocators this year has been among the worst in the last 50 years. Considering Large Caps (S&P 500), Small Caps (Russell 2000), EAFE, REITs (NAREIT Composite), Commodities (S&P/GSCI), 10-year U.S. Treasury Bonds, and Gold, the top YTD performance spot is held by Commodities (despite an October setback). 

Chart 1

Historically, asset allocators would have been surprisingly well-served by owning all seven of these asset classes in equal weights (rebalanced at year end). During the 45 years ended in 2017, that portfolio would have nearly matched the S&P 500 total return (+10.2% annualized versus +10.4%, respectively), but with dramatically less annual volatility (11.7% versus 17.5%). CPI inflation over this period was 4% annualized, leaving a respectable real return of more than +6% annualized. Given this strategy’s required skill (none) and trading frequency (minimal), the results border on the remarkable. 

But this so-called “agnostic” asset allocation portfolio has fallen flat during 2018, delivering a total return of -1.2% through November 2nd. If a year-end rally doesn’t develop across most of the assets, there’s risk of a seventh down year in the 46-year (hypothetical) life of the strategy.

Chart 2

About The Author

Doug Ramsey / Chief Investment Officer & Portfolio Manager

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