- Mutual Funds
- Invest Now
- About Us
What History Tells Us About Asset Allocation
We believe effective asset allocation leads to investing in the combination of stocks, bonds and cash that has the best chance of achieving your short-term and long-term investment goals. Most investors understand that they can’t reach their investment goals by holding only cash, but are concerned about the volatility of the stock market and the very low yields offered by bonds.
To help investors make logical asset allocation decisions, we looked at the very long term record of stocks, bonds, cash and inflation from 1925-2010. This period includes many different environments, such as the Great Depression, World War II, the challenging period of the 1970s, the great bull market from 1982-1999, and the difficult decade that ended in 2009. It’s also useful because it includes periods of deflation and double-digit inflation, periods of rising and falling interest rates, and both bull and bear markets for stocks.
To demonstrate how stocks, bonds, cash and inflation performed, we made a hypothetical investment in each asset category starting in January 1, 1925, then another February 1, 1925, and each subsequent month for over 80 years, and held each for 1 year, 3 years, 10 years and 20 years.
Stocks for the Long Term
Of the 780 rolling 20 years periods from 1925 to 2010, there has never been a 20-year holding period when stocks lost money. Although some stock strategies have managed to lose money for 20 years, the S&P 500 Index has never lost money when held 20 years or longer.
From 1925 to 2010, stocks outperformed bonds 69% of the time when held 3 years, 82% of the time when held 10 years, and 98% of the time when held 20 years. Since stocks historically have outperformed bonds and cash most of the time, why would an investor hold bonds or cash?
Bonds May Buffer Volatility
For shorter time periods, bonds may offer a better trade-off between risk and reward. Held less than three years, stocks have occasionally experienced severe losses. Looking at the Rolling 3 Year Periods chart, below, you can see that stocks gained as much as 200% and lost nearly 80%. In comparison, the worst performance from bonds for these three year periods was a small loss of -3.3%, and the best performance from bonds was better than the average performance from stocks.
Rolling 3 Year Periods 1925-2010
Figures assume reinvestment of capital gains and dividends, but does not reflect sales charges or taxes, which would lower these figures.
Past performance is no guarantee of future results. Historical performance represents index performance and does not reflect the performance of any FundX Upgrader Fund. You cannot invest directly in an index. Current performance of the FundX Upgrader Funds is located here. See footnotes below for important index definitions. Cash - Ibbotson Associates SBBI 30 Day TBill Total Return Index; Inflation - Ibbotson Associates SBBI U.S. Inflation; Bonds - MARE Custom Bond Index; Stocks - S&P 500.
Stocks have even lost money when held as long as 10 years —most recently, for the decade ending in 2010—but bonds have never been negative for 10 years or more and bonds have done much better than cash.
Because stocks and bonds can lose money when held only a few years, very short-term goals should be funded with cash. Since 1925, cash has basically kept up with inflation, never suffered a loss, and actually beat inflation in those rare times when inflation was negative.
The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The Barclays Aggregate Bond Index is an unmanaged index generally representative of intermediate-term government bonds, investment grade corporate debt securities and mortgage-backed securities. Ibbotson Associates SBBI U.S. Inflation is an inflationary indicator based on the Consumer Price Index (CPI). MARE Custom Bond Index - Prior to 1976, 34% of the custom index is composed of the Ibbotson U.S. Long-Term Corporate Bond Index and 66% is composed of the Ibbotson U.S. Intermediate-Term Government Bond Index. From 1976 on, the index returns are composed of the BarCap Aggregate Bond Index. Ibbotson Associates SBBI 30 Day TBill Total Return Index - An index which reflects U.S. Treasury Bill returns. You cannot invest directly in an index.