When reviewing these 12 asset classes from 2006-2015, the “top seed” from the previous year (best performing asset class) had an average finish of 6.7 out of the 12 asset classes the next year. Only on one occasion did the top performer of the previous year repeat as the top performer the next year (U.S. Large Cap in 2014 and 2015).
What about the strategy of picking the lowest seed from the previous year (poorest performing asset class) for the next year? The 12 seed from the previous year had an average finish of 7.9 out of the twelve asset classes the following year. There was one case of worst to first. In 2008, Emerging Market Equity was the poorest performer, and it became the top performer in 2009.
Of the 12 broad asset classes listed, no asset class finished first more than two years over the past decade (U.S. Large Cap, U.S. Small Cap, Emerging Markets, and Global Real Estate each finished first twice; U.S. Bonds and International Bonds each once). The asset class with the highest 10-year return (U.S. Mid Cap) was never the top performer in any individual year.
This asset class data highlights the value of a diversified investment portfolio. Unlike the NCAA tournament where the top seeds often reach the final four and are crowned champions, the top performing asset classes are not necessarily the same from year to year. Each asset class has characteristics that favor differing economic and market seasons. Asset class diversification offers the potential to enhance a portfolio’s risk-reward profile. Adding a layer of tactical management offers the potential to augment investment opportunities and portfolio protection.
While NCAA tournament brackets require a fan to pick a single champion, investors constructing diversified investment portfolios do not face a similar constraint. A winning investment bracket is more similar to constructing a team of 12 players, each playing a valuable role towards the success of the portfolio.[related_stories]
We should not forget that ETFs have completely revolutionized the market’s investment bracket. In the past, deep asset class diversification was only available to large, institutional investors. ETFs allow an educated investor and a careful financial advisor to efficiently and inexpensively access a broad spectrum of asset classes and sub-asset classes.
Many diversified, tactical strategies are now equally available to all types of investors. Utilizing the large opportunity set of ETFs that are targeted, traded, and transparent is the equivalent of expanding the tournament bracket from eight teams to its current 68 teams!
My NCAA Tournament Bracket is already “busted” for this year, but a diversified ETF portfolio never goes out of season. Amidst the buzzer beaters that punctuate basketball victories this time of year, don’t forget to celebrate one of the true investment champions: the diversified ETF portfolio.