• Bernhardt Wealth Management

Are Some Investments Better than Others for Long-Term Growth?

Updated: Mar 13

One of the most common educational props in the financial planning world is something known as the Callan Periodic Table of Investment Returns. Developed by the Callan Institute, a leading investment research and education group, the table can be constructed in various ways to show which general asset types have performed best during a particular period: monthly, annually, or over longer periods. Typically, the result for shorter time periods (from a month to a year) is rather random, as vividly illustrated by the yearly and monthly return chart shown below. Each column represents a different time period. Notice that the ranked order of different asset classes (for example, dark blue for large-capitalization stocks, orange for emerging market stocks, green for US fixed income), is presented with the highest performers at the top of each column, and the worst performers at the bottom. See if you can determine a predictable pattern.

Viewing the randomness of the shorter-term performance results illustrates, better than words, that we really cannot predict whether international stocks will outperform domestic large-cap or small-cap stocks in any given month or year, or whether any of them will outperform various bond investments in the next 12 months. This also explains why we recommend diversified portfolios. Put simply, no one knows, from one year to the next, which type of investment is going to perform better than what.


But the interesting thing is that if you look out over longer time periods, the patterns of return are not nearly so random. In fact, when a professor of business analytics at the University of San Francisco, Stephen Huxley, constructed the same chart over rolling 30-year periods, he found that small-capitalization stocks and value stocks pretty nearly always finished with the highest returns. You can see from the long-term table below that real estate investment trusts (light green in Huxley’s coding) consistently fell in the middle of the pack, and bond investments (various shades of blue) alternated places at the bottom of the long-term return chart. At the top of the long-term return rankings? Small-cap value stocks (maroon), small-cap neutral or blended stocks (darker red), mid-cap value stocks (lighter red), and a smattering of large-cap stocks (white) and emerging market stocks (buff). In fact, a closer look at the long-term chart reveals that the entire top half of each column is dominated by various types of equity (stock) asset classes.

What does that mean? As professional financial advisors and wealth managers, we consider the striking consistency of this simple chart as strong evidence of something that is talked about but frequently forgotten: that over longer time spans, returns become more consistent and predictable than they are in shorter intervals, and that certain asset classes consistently, even if unpredictably in the short term, provide more upside potential than others. A simple way to think of it is that as an owner of companies (buying stocks), you are likely to eventually earn higher returns than if you are a lender to companies (buying bonds). You just have to wait long enough for the trend to play itself out.


Does that mean we should throw away the idea of diversification? Of course not. But it might mean that, if you have a long enough time horizon, you have a decent chance of earning higher returns if you overweight certain categories of assets and underweight others. You should still hold both and rebalance each year, which raises the odds of experiencing a smoother investment ride while you wait for the asset returns to sort themselves out over time.


If you have questions about the performance of your portfolio, or if you are wondering what types of assets would be best for helping you meet your investment goals, we can provide solid, research-based answers. Please contact us to get the conversation started.


Buen Camino!

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