5 great equity strategies over the past 94 years

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If you are an investor, one of your most important jobs is to diversify your portfolio. Find the right combination of assets and you’ll be able to get what I call “calm and a part of the action”.

But one size does not fit everyone. Some investors want peace of mind above almost everything else. Others seem to want all the “action” they can get.

This spring, my team at the Merriman Financial Education Foundation produced a new tool that uses a quilt-like color chart to help investors make better decisions by comparing five simple equity strategies.

For each calendar year from 1928 to 2021, you can see at a glance how each of the five strategies behaved in relation to each other, along with their returns for the year. Colored boxes make it easy to understand a lot of information on a piece of paper, or just on a computer screen.

Here’s why it’s important: In 1999, after the S&P 500 SPX,
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had appreciated 17% for 25 years, many investors decided that the index was all they needed to capture the profits from this list of well-known and respected companies.

However, by then many academics were teaching (and I was preaching) the merits of diversifying into other types of stocks (asset classes) with favorable long-term returns, and rising and falling at different times and different rates. than the S&P 500..

In the chart, you’ll see green boxes for the S&P 500, which represent large-cap combined stocks, a mix of mostly growth stocks, and some value stocks.

The pink boxes (called “US4F”) represent a four-fund strategy made up of equal shares of the four major U.S. asset classes: the S&P 500, large-cap stocks, small-cap combination stocks, and equities. small capitalization value.

In a chart at the bottom right of the chart, you can see that this combination had a considerably higher long-term compound annual growth rate (12%) than the 10.2% S&P 500.

Perhaps the most interesting of these five strategies (“US2F” and Orange) is a combination of two quite different asset classes: the S&P 500, dominated by the shares of very large companies with popular stocks, and the stock stocks of small capitalization, representing small shares. companies with relatively unknown and unpopular shares.

In 67 of the 94 years of this study, one or the other of these two was the best performance and the other the worst. But when you put them together, the combination had considerably better long-term performance than the S&P 500, with much less volatility.

This is how smart diversification works: tranquility along with a part of the action.

This is how I would evaluate this (orange) two-fund strategy:

Good: In many years, this was much better than average.

Not so good: This combination rarely resembled the changes reported in “the stock market”. For many years, its yields were lower than those of the S&P 500.

Bottom line: This is a good option for investors looking for solid long-term returns, as long as they understand that, most of the time, small-cap value stocks don’t go up and down in sync with the S&P 500.

Let’s look at the other four strategies in this chart.

The S&P 500 index (green) is the default for many people and is much better than actively managed funds. (The total U.S. stock market index has similar long-term returns.)

Good: This index is dominated by large, well-known and well-managed companies. This is how “the stock market” is commonly referred to in the news. In 36 of the 94 calendar years, this was the highest-performing of the five strategies.

Not so good: Of the top four U.S. asset classes, this index has had the lowest long-term performance. In 48 of 94 calendar years, this was the weakest performance.

Bottom line: This is good for investors who are willing to accept good (but not exceptional) long-term returns and who trust what Warren Buffett recommends to most investors (which is not the same as what he does with the money he manages) .

A combination of four backgrounds of the US asset classes (pink boxes) includes all major parts of the US stock market.

Good: In the long run, this offers a much higher return than the S&P 500, with much less volatility.

Not so good: This strategy has almost never had the best performance.

Bottom line: I think this is a great option for accumulators and retirees who want better performance than the S&P 500, without much drama.

In the long run, the combination of value of two funds (orange boxes) of large capitalization value and small capitalization value has surpassed everything I have described so far.

Good: Performance, pure and simple, harnessing the power of stocks you can buy at bargain prices.

Not so good: Shares of value come in and lose favor. To get their long-term rewards, you need to stay with them for long periods of low performance.

Bottom line: This is a good option for aggressive investors who can tolerate risk and want to emulate the way Warren Buffett manages money.

Finally, small capital value by itself (“USSV” and blue) focuses on the single asset class with the highest long-term performance.

Good: A compound annual growth rate 1928-2021 of 13.4%.

Not so good: In 31 calendar years, or about a third of the time, small-cap value stocks had the worst return.

Bottom line: As a standalone strategy, I think it is best suited for investors who are aggressively saving during their early years of work.

I think there is something for everyone here. If I were pressured to make a general recommendation out of these five strategies, I don’t think investors would be very wrong with the portfolio of four U.S. funds (pink boxes).

To learn more about the history of these five strategies, check out my latest podcast.

Richard Buck contributed to this article.

Paul Merriman and Richard Buck are the authors We are talking about millions! 12 Easy Ways to Overload Your Rstretching. Get your free copy.



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