Monday, January 22, 2018

Benchmark Asset Class ETF Returns for 2017

Chemistry 101
Below you’ll see what people in the investment business refer to as the periodic table of (asset class)
returns—named in honor of the periodic table of elements that we all studied in our high school
chemistry class. Koch Capital updates this table annually with the one-year returns and standard
deviation (volatility) of 13 benchmark asset class Exchanged-Traded Funds (ETFs), which collectively
represent a broad, global swath of the investable universe.

The table lists the annual returns for each asset class, ranked from best to worst such that the asset
classes with the highest returns are listed above those with the lowest returns for the year. The
volatility column to the far right displays the annual standard deviation of each asset class to its
immediate left; the higher the value, the more volatile that asset class’ price fluctuations.

Click here to view the entire chart and remember that past performance is not indicative of future results
Source: Koch Capital, InvestSpy
Color Matters
The asset classes are organized by color to make the table presentation more interesting. For example,
all the equity (stock) categories are shown in the blues and purples; the S&P 500, a common
equity benchmark, stands out in its signature black. The fixed income (bond) categories are in red,
orange and tan, and bleed into the yellow colors, which represent alternative asset categories. For this
demonstration, the alternatives include just gold and commodities. In green, cash (and cash
equivalents), the thirteenth asset class category, is represented by short-term Treasury bonds that
mature in one year or less.

The 2017 rising global tide lifts all boats, and most notably for the foreign developed and emerging
markets. Domestic US stocks weren’t shabby either providing double digit returns in both the large cap
and small cap arenas. Even the benchmark bonds in this example eked out positive returns in face of
moderately increasing interest rates.   

In summary, it was NOT a normal year for the world’s broad asset classes. The 2017 synchronized
global growth story, favorable expected fiscal policy changes in the form of US corporate tax and
regulatory relief, and continuing low interest rates contributed to the strong tailwind that drove these
terrific annual returns across the globe.

Pattern Hunting
As humans our brains naturally try to find patterns in what we see. Do you see any predictable pattern
of asset class returns from one year to the next? The answer is no. The point here is that asset class
returns are random no matter how convincingly your brain tells you, “Hey, I see a repeating historical
pattern here and I’m sure it will repeat in the future.”

Source:InvestSpy 1yr ETF correlations to 12/31/2017

The more subtle piece of information in the table above is the relationship between risk and correlation.
Even though long-term Treasury bonds TLT (red highlight) are volatile (risky), this asset class is
uncorrelated with most stock-based asset classes. When the S&P 500 SPY (black highlight) has
good year (over 10% annual return), long-term Treasury bonds (black) tends to under-perform, and
vice versa. Thus, you get the classic zig-zag relationship between stocks and bonds/alternatives, a
return saver courtesy of real diversification that helps your portfolio survive in years like 2008 and 2011.

Occasionally there will be years where both stocks (S&P 500) and bonds (US Gov’t 20yr Treasury)
deliver negative returns, although I haven’t recorded this outcome since starting the periodic table in
2001. It’s not a question of if but when this double barrel nasty outcome will occur, especially given this
year’s possible end to the 35-year bull market run in bonds. And when it does, make sure you have a
strategy to control your emotions and a plan to stay the course.

About Jim Koch
Jim Koch is the Founder and Principal of Koch Capital Management, an independent Registered Investment
Advisor (RIA) in the San Francisco Bay Area. He specializes in providing customized financial solutions to
individuals, families, trusts and business entities so they are better able to achieve their goals. Jim sees himself
as an “implementer” of financial innovation, using state-of-the-art technology to provide practical investment
management and retirement planning solutions for clients.

General Disclosures
This information is provided for informational/educational purposes only. The opinions referenced are as of the date of publication and are subject
to change due to changes in the market or economic conditions and may not necessarily come to pass. Nothing presented herein is or is
intended to constitute investment advice, and no investment decision should be made based on any information provided herein. The information
contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Past
performance is no guarantee of future results.

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