Monday, February 25, 2019

Benchmark Asset Class ETF Returns for 2018

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, Yahoo Finance
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.

While 2017 was a phenomenal year for both stocks and bonds, 2018 was the opposite. Only cash and
short-term bonds eked out positive returns. Rising interest rates caused the longer duration TIPS and
20-year Treasury bond prices to fall.  And the end-of-year swoon in global equity markets sunk all
broad stock asset classes for 2018.

In summary, cash became investable again given the Federal Fund Rate increase.  Owning some
cash in your portfolio helped to counteract the downdraft in your stocks and bonds. If 2017-2018 was
all about the synchronized global growth story, 2019 is all about the possible synchronized global
slowdown given US-China trade tensions, stagnant Europe and the uncertain political environment.
At least we’ll see if the stock market can climb a wall of worry in 2019.

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 this way in the future.”

Occasionally there will be years when both stocks (S&P 500) and bonds (US Gov’t 20-year Treasury)
deliver negative returns, and 2018 was one of those rare years. It appears that the 35-year bull market
run in bonds over, but we still need see long-term interest rates creep up beyond 3% to indicate the
economy improving and/or inflation is rising. And when it does, make sure you have a strategy to
control your emotions and a plan to stay the course given bonds could get whacked again.

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, business entities and other advisors 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.

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