Catch-up Time

The last twelve months have been chaotic with pandemic ups and downs, political drama, and mostly normal market volatility.  The S&P 500 Index, the index of large cap equities in the U.S., gets most of the attention from the popular press and has certainly been on a tear since the large drawdown at the outset of the pandemic back in March 2020.  But, what about all the other major asset classes like small- and mid-cap stocks, real estate investment trusts, international developed and emerging market equities, not to mention the sub classes in the bond market?  Here’s how they did!

A well-diversified portfolio needs a mix of stocks and bonds that complement each other and have some correlations that offset or are at least less than perfectly correlated.  This allows your portfolio to diversify its exposure to capture some of the gains from other asset classes that rally while the S&P 500 may pause.  This is the case we have seen over the past twelve months!

Per the chart below, it is interesting to note that the S&P 500 (VOO, the medium blue line near the middle) grew from a $10,000 investment on September 30, 2020 to $13,491 on August 31, 2021, a +34.9% gain!  However, that large total return is NOT from the best performing asset class.  Over the last twelve months ended August 31, 2021, the top performing major asset class is small cap equities (SCHA, the dark blue line at the top of the chart) that is up to $15,173, a +51.7% gain!  Also besting the S&P 500 are large cap, high dividend value-focused equities (DVY, the dark green line) up +45.8%, mid cap equities (SCHM, the yellow line) up +44.2%, an active computer-assisted strategy (AIEQ, the pale orange line) up +39.9%, and real estate investment trusts (VNQ, the dark orange line) up +37.5%.  International and emerging market equities continue to trail the U.S. markets and have room to grow.

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We have seen the same kind of diversifying exposure performance from the bond market.   Core bonds, mostly defined by the Bloomberg Barclays Aggregate Bond Index (AGG, the light gray line at the very bottom), produced a total return of -1.7%, not unexpected given the historic low level of rates we have seen over the past year.  Other diversifying fixed income sub-asset classes did better such as preferred stocks (PFF, the brown line) at +8.1%, high yield bonds (HYG, the navy blue line) at +5.0%, and bank loans (BKLN, the pale blue line) at +1.8%.

Every market is different and there are a lot of extenuating circumstance underlying this particular market checkpoint.  Most importantly, this is a short time horizon after a major market dislocation, so a lot of the excess returns shown over the last year simply show a “catch-up” from an oversold position during the height of the pandemic.  But, we always believe that being properly diversified consistent with your risk tolerance will produce higher risk-adjusted returns and make you better able to achieve your financial goals.