As readers of this blog are well aware, diversifying asset classes have had a difficult time beating core assets over the past few years. Over shorter time horizons, such as during 2023 Q4, diversifiers have had some advantage, but we are starting to see large lags again as we enter 2024.
The S&P 500, once again overwhelmed by the performance success of the “Magnificent 7” – except for Tesla that has struggled mightily so far this year, is off to a good start. The combined year-to-date (through Feb. 2, 2024) performance of Microsoft, Apple, Nvidia, Amazon, Meta, Alphabet, and Tesla that makes up a huge 27% of the S&P 500 is +9.1% compared to the S&P 500 (IVV) return of +4.0%. The performance of key diversifiers like small cap (SCHA, -2.9%), mid-cap (SCHM, -0.4%), international developed equities (SCHF, -0.6%) and emerging markets (SCHE, -3.9%) pales in comparison.
So, what do we do? Let’s look at the Callan Periodic Table of Investment Returns (see chart below) for a historical perspective. As we can see, over the last 20 years the top annual performers were U.S. Large Cap (medium blue), U.S. Small Cap (dark blue), Emerging Market (orange) and Real Estate (red) with each taking top honors four times. But, over the most recent last five years, U.S. Large Cap, i.e., the S&P 500, has been at the top three times! And, over the most distant six years, Emerging Markets was tops three times! The leader board has changed hands many times.
The idea, of course, is to have a well-designed mix of asset classes such that some “zig when the others zag”. That has not been the case over the last three years with U.S. Large Cap being such a dominant leader. Consequently, well-diversified portfolios over the recent past have actually LAGGED portfolios made up of less-diversified portfolios targeted only to the S&P 500. Can this go on forever? History says NO, but we shall see.
D&A is a strong believer in a well-diversified portfolio targeted to an investors time horizon, risk preference/tolerance and special considerations to help meet their goals.