10-year performance of asset classes

Financial Planning - Financial planning in general. (Moderated) 

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Subject Author Date 10-year performance of asset classes Beliavsky 10-12-2007  Re: 10-year performance of asset classes Mark Freeland 10-12-2007
Posted by Beliavsky on October 12, 2007, 10:18 am I read this from Morningstar today *************************************************************************************************** Fund Spy: Baseball Gives a Lesson On Relative Return Limits Michael Breen 10-11-07 06:00 AM "The Chicago Cubs were recently bounced from Major League Baseball's playoffs by the Arizona Diamondbacks. We should have seen it coming. Forget goats and curses. This was all about the numbers. And the numbers said Arizona had the better team. The Cubs and Diamondbacks both won their respective divisions, but those groups were not equal. Arizona topped a strong division, while the Cubs barely won baseball's weakest. In fact, more than a third of baseball's 30 teams had better records than the Cubs'. Clearly, topping a weak group doesn't always equate to absolute strength. And just as important, quality teams are often hidden in the middle of tough groups. The same is true in investing. We sort funds by similar styles so that we can make apples-to-apples comparisons among peers. Such comparisons are important. But, they should always be set against a backdrop of absolute performance. As the old saying goes, you can't eat relative returns. A glance at the 10-year annualized returns for Morningstar's domestic- and foreign-stock categories shows a range from 15.7% down to 2.3%. In the basement are Japan stock funds. Even the top-rated funds in this category haven't meaningfully compounded capital over time. At the opposite end of the spectrum are 10 categories in which the typical fund has returned more than10% annually over the past decade. We trolled these waters and found plenty of funds that we think highly of, even though their current rankings and ratings don't appear great." *************************************************************************************************** I think the logic is poor. The author seems to be assuming that prior 10 year performance of an asset class is predictive of future performance. Maybe it is, but my default assumption would be that it is not predictive or predictive in the *opposite* direction, with asset classes that have suffered for a long time bouncing back. No evidence is provided for the author's theory. If anyone knows of a study, I'd be interested to see it. Posted by Mark Freeland on October 12, 2007, 11:39 am >I read this from Morningstar today > > *************************************************************************************************** > Fund Spy: Baseball Gives a Lesson On Relative Return Limits > Michael Breen 10-11-07 06:00 AM http://news.morningstar.com/articlenet/article.aspx?id=209510 *************************************************************************************************** > > I think the logic is poor. The author seems to be assuming that prior > 10 year performance of an asset class is predictive of future > performance. Maybe it is, but my default assumption would be that it > is not predictive or predictive in the *opposite* direction, with > asset classes that have suffered for a long time bouncing back. No > evidence is provided for the author's theory. If anyone knows of a > study, I'd be interested to see it. The writer is not communicating his ideas well. I don't think he's (pardon the pun) off-base, but he's misapplying an analogy. He might have clarified his point by saying that wild card teams are often better than the teams they face (though the Yankees didn't have pitching at the beginning of the season, and they ended the season the same way). So he's looking at "teams" that had an off year, _regardless_ of the division (category). Let's face it - categories like Intermediate Term Bond (FPA New Income), or even Mid Cap Blend (Weitz Hickory), haven't been chart toppers. Rather, he is agreeing with you, that the pendulum swings both ways, and if you have good players (fund manager, analysts) and solid fundamentals, that will pay off eventually. I think he's wrong with some of his picks, for various reasons, but that's another matter. Finally, depending upon how broadly one splits asset classes, there certainly are studies showing persistence. Equities outperform bonds outperform cash over the long term, and usually one is wrong betting against that. Mark Freeland BnetOnewsX@sbcglobal.net Similar Threads Posted Looking for anyone with comparable performance... February 25, 2008, 1:55 pm Any place to summarize ETF back track performance? December 7, 2006, 5:01 am Asset Allocation and MVO May 16, 2007, 7:12 pm Pls help Asset Allocation Question October 13, 2006, 6:49 pm Asset Allocation question October 20, 2006, 6:24 pm Asset Allocation question December 22, 2006, 11:25 am Looking for some thoughts on my asset allocations January 30, 2007, 5:06 pm re: asset allocation/ bonds January 9, 2007, 1:34 pm Asset based fee schedules January 21, 2008, 7:51 pm Re: Matrix Asset Allocation August 1, 2007, 4:05 pm