Recs

2

A Retirement Plan for All Seasons

Quick, what has been the best-performing asset class since 1972?

If you answered,"U.S. stocks," you'd be wrong. "Then it must be international stocks, especially since they've done so well over the past few years," you might posit. But no, that's not right, either. "Commodities?" Nah. "Hedge funds?" Please. "How about real estate investment trusts?"

Bingo!

Yes, REITs have been the best-performing asset class since the early '70s, according to Roger Gibson, president of Gibson Capital Management and the author of Asset Allocation: Balancing Financial Risk. In fact, U.S. stocks have finished behind those other major asset classes (except hedge funds, which Gibson didn't include in his research and really isn't its own asset class anyway).

While we Fools believe in the long-term wealth-creating power of American stocks, the bottom line is that there are investments out there that often beat the pants off U.S. equities.

In the inaugural issue of my Rule Your Retirement newsletter, I quoted from an article Warren Buffett wrote for Fortune magazine in 1999. He pointed out the level of the Dow Jones Industrial Average at two points over a 17-year period:

  • Dec. 31, 1964: 874.12
  • Dec. 31, 1981: 875

Buffett wrote: "Now, I'm known as a long-term investor and a patient guy, but that is not my idea of a big move." What's the lesson for investors more than 20 years later? The stock market may bounce around this year and that, but it can essentially be flat over a long period of time -- even if GDP rises 400% and revenues from companies in the Fortune 500 rise 500%, as they did from 1964 to 1981.

Owning a piece of every pie
Let's take a look at the returns of various exchange-traded funds (ETFs) over the past three years, as well as during the recent sell-off:

ETF

Since June 30, 2003

Since May 1, 2006

Spiders (AMEX: SPY  )

37.4%

-2%

iShares Russell 2000 Index (AMEX: IWM  )

67.2%

-4.5%

iShares MSCI EAFE (AMEX: EFA  )

90.3%

-3.8%

iShares Dow Jones US Real Estate (AMEX: IYR  )

91.7%

2.7%

iShares Goldman Sachs Natural Resources (AMEX: IGE  )

132.3%

-3.3%

*Numbers as of market close, June 30, 2006

Looking at the past three years, even U.S. small-cap stocks haven't been able to keep up with REITs, international stocks (as represented by the EAFE ETF), and commodities (as represented by the iShares Goldman Sachs Natural Resources ETF, which isn't a pure commodities ETF but the closest thing available until recently).

So, should you abandon U.S. stocks? Absolutely not -- especially not now. Dumping what has lagged and jumping into what's been hot is a sure recipe for buying high and selling low. No one knows what will happen in the short term, but I wouldn't be surprised if the order of worst-to-best performers over the past three years will be reversed in the following three years.

Plus, take a look at what's happened since May 1. Every asset class dropped more than underloved U.S. large-cap stocks -- except REITs, which are actually in the black. Did you know back then that REITs would make money over the next two months and that the S&P 500 would fare better than the much-ballyhooed international, commodities, and small-cap markets? Of course not -- no one did. So the smart investor who doesn't have a crystal ball owns a little bit of it all.

The whole beats the parts
Of course, if you had a crystal ball, you could pick out the best-performing asset class and just invest in that. Thus, if you were a fortune-telling investor in 1972, you'd have put all your money in REITs and earned 13.4% annually, compared with 12.03% for commodities, 11.34% in international stocks, and 11.23% for U.S. stocks, according to Roger Gibson's research.

But guess the compound average annual return of a portfolio that had 25% in each of those asset classes and rebalanced annually. Come on, take a guess. Got one? Good.

Did you guess 13.3%? If so, you're right. A portfolio equally constructed of the four assets and readjusted each year beat three of the four individual assets (and barely lost to the other one) -- and with a lot less volatility.

Just as the year has different seasons, markets (and the investors who love them) favor different asset classes. Betting on just one to see you to and through retirement may leave you out in the cold.

For more articles in this series:

Want to learn more about asset allocation, view model portfolios, and receive The Motley Fool's 10 Monster Stocks Blue Chip Report free? Check outRule Your Retirement.

Robert Brokamp doesn't own any of the ETFs mentioned in this article, although he did marry a woman whose initials were once ERF. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 505484, ~/Articles/ArticleHandler.aspx, 9/18/2014 5:51:42 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Robert Brokamp
TMFBro

Today's Market

updated Moments ago Sponsored by:
DOW 17,265.99 109.14 0.64%
S&P 500 2,011.36 9.79 0.49%
NASD 4,593.43 31.24 0.68%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/18/2014 4:00 PM
EFA $66.20 Up +0.51 +0.78%
iShares MSCI EAFE… CAPS Rating: **
IGE $46.89 Down -0.28 -0.59%
iShares S&P GSSI N… CAPS Rating: ***
IWM $115.43 Up +0.70 +0.61%
iShares Russell 20… CAPS Rating: **
IYR $70.91 Down -0.52 -0.73%
iShares Dow Jones… CAPS Rating: *
SPY $201.82 Up +1.07 +0.53%
S&P Depository Rec… CAPS Rating: No stars

Advertisement