The order of performance based on comparison of a representative sample from each of the 4 asset classes, from highest to lowest: stocks, bonds, real estate, and gold.
We discussed the makeup of asset classes in our blog “Types of Asset classes.” The 4 asset classes, which are Stocks, Bonds, Commodities and Real Estate, are considered uncorrelated asset classes. They are represented by the S&P 500 index, Barclays Aggregate Bond Index, Gold price, and median home price in our analysis. We will compare their last 30-year performance in this article. We used the CAGR (Compounded Aggregate Growth Rate) for measuring annualized return and Standard Deviation for volatility. These metrics are explained in our blog “Investment Return and Volatility.”
The stock market had the best return with a 10% CAGR, but its volatility was also the highest. You can find details of other financial metrics for this stock market index in “S&P 500 Performance in the Last 50 Years.” Bonds performed the next best partly due to the falling interest rate environment. However, their volatility was the lowest among the 4 asset classes compared here.
Gold performed marginally better than the U.S. home median price, but was very volatile, especially relative to its return. The Silicon Valley real estate market did much better than the national average, but still underperformed the bond market. It was also twice as volatile as the average U.S. home. The financial leverage from mortgage and rent potential for real estate were not considered in this analysis, which would have effectively boosted its performance.
Let us make the same comparison by observing the pattern of annual returns. The grey shaded area represents the last 3 recessions. Clearly, the stock market had huge swings with large negative returns during recessions and large positive returns during the subsequent market recovery period. In comparison, bond returns were more measured and mostly stayed positive. The bond returns diminish as we approach the present day because of the bottoming of the interest rates. Gold prices had a good run at the turn of the century but also had a few large negative annual returns. The Silicon Valley real estate market had good positive returns except during the 2008 housing recession, which depressed its overall return.
In the next blog, “Portfolio Construction and Rebalancing,” we review the performance of these asset classes at the portfolio level.
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