The Long View on Asset Class Returns

Here’s a good look at the 30,000 foot view of three major asset classes – gold, t-bonds and stocks.  The following is the rolling 10 year average total returns since 1937.  Gold was pegged prior to the 60’s so the data is a little light there.  But I think the chart tells an interesting story for those of us who believe in mean reversion.

My big conclusions:

  • Bonds are likely to perform much worse in the next 10 years than they have in the last 10 years.
  • The gold rally probably isn’t over yet, but we’re closer to the beginning of a downside mean reversion than we are to a big upswing.  That means gold is also likely to perform worse in the coming 10 years than it has in the last 10 years.
  • Equities are coming off of a rather stagnant period and in the process of reverting upward.
I don’t really do the whole “buy and hold” thing, but if I had to bet on the asset class that outperforms over the next 10 years I’d most definitely bet on equities.  But of course, it’s silly to put all your eggs in one basket.  Proper macro portfolio construction is all about understanding a hierarchy of asset classes and understanding how different instruments serve differing roles in a portfolio.  But still, it’s a useful big picture view of the world…..

Chart via Orcam Investment Research:


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:

  • fin

    Is this conclusion based on your macro analysis of economy or is based on the chart showing 2 peaks for equity, one peak for gold, and so on?

  • jaymaster

    It’s interesting to see that gold is the only asset that produced negative 10 year returns.

    Especially since so many people consider it a “store of value”.

  • Cullen Roche

    A bit of both, but I am looking at the 75 year average returns in relation to the past 10 year averages. The two that stand out are bonds and gold which have both returned almost TWICE their 75 year average. Stocks have actually done much better than most people believe (probably because most people don’t use total return), but are still below their historical return rate….

  • Frederick

    This is a very interesting perspective. It makes me think twice about my allocation in the Permanent Portfolio. Any thoughts there Cullen?

  • Gubbmintcheese

    Interesting to see what this chart would look like if you used Japanese stocks and bonds rather than US inputs.

  • Entenschnabel

    Cullen – On your graph it looks like bonds had a average return of below 2% over the last 10y. How can that be with the rate compression of late that had bonds prices appreciate strongly (or looking at the 10y, it traded above 4% yield 10 years ago, and further out yielded even more).

  • Geoff

    Is the T-bond the 30yr or the 10yr? If it is the 10yr, you could just plug in the current yield of 1.87% for the projected return over the next 10 years. In which case, I’d agree that equities are probably a better bet.

  • Rademaker

    The left hand side y-axis denominations show the percentages for bonds and stocks. The last reading for bonds is around 6%.

    It’s pretty confusing and misleading, in my opinion. Why didn’t they stretch out the graph vertically a bit more and use the same denominations for all asset classes?

  • Cullen Roche

    I used two different scales here because the gold returns in the 70s were stupid high. So gold is RHS and bonds/stocks are LHS. Bonds were closer to 6% 10 year returns. Sorry for the confusion there.

  • Tom Brown


    I’m with you on the over-hyping of the fiscal cliff, etc. And I like your attempt to make a realistic assessment of what the deal actually meant. When the fight over the debt ceiling started getting serious in the Summer of 2011, I have to admit I kind of panicked and decided to essentially change course from my LONG time investing strategy, which is basically a John Bogle buy and hold low cost index mutual fund strategy with a mix of about 80% equities and 20% broad based bond funds. I stuck to that even through the big downturn in 2008 (and I pretty much got all my money back too). But it seemed to me that the dead-enders in the GOP were out to destroy the government itself…. especially with Obama as president. I’m letting my political bias show here a bit, but I’ve been both a Republican and Democratic voter over the decades and it seemed to me that the Tea Party people voted in in 2010 were really extremists and they scared me a bit, so I pulled almost ALL of my money out of stocks and long term bonds. Now I’m just letting the bulk of my retirement sit in something called a “Stable Principal” fund, which is our 401k default fund. For example, during this fiscal cliff fight… which didn’t scare me too much since I’m over worrying about all this self-generated BS drama from congress, I just didn’t do anything except let it ride in short term corporate and government bond funds and this “stable principal” fund. The “stable principal” fund is a bit of a mystery to me though, and a bit scary since it WAY outperforms a money market fund, but strives to maintain a $1 per share value (in a manner similar to a money market fund). It says it has 66% of its holdings in something called “Managed Synthetics.” I know I’ve asked you about this before, and I think you said you didn’t know too much about that investment class, but I thought I’d ask again. What the heck is a “Managed Synthetic” and how safe is it? BTW, the other two components of this fund are 20.10% “Insurance Contracts” and 13.90% Money Market. The 1-year return is 2.24%, which is way better than the return I get from my Vanguard Prime Money Market fund. The fund is advertized by the company which manages our 401K as “Low Risk” but it seems very odd to me. You cannot find an analogous fund for an IRA, … these “stable principal” funds only seem to be an option for 401ks.

  • Cullen Roche

    Those bastards with their misleading chart! Arggg!

    Here’s the same chart on one axis. I only used the second axis because the gold returns from the 70’s make the bond picture appear much more boring than they really were….

  • Tom Brown

    I don’t know if these links will work (since I always log in to see them), but here’s a one page sheet describing out 401k’s “stable principal” fund:

    And here’s the prospectus:

  • jaymaster

    Thanks, Cullen, I like that one a little better.

    Not only does it show more clearly that gold is the only class to go negative, but that gold is also MUCH more volatile.

  • jaymaster

    Although one more tweak would be to get rid of the “LHS” and “RHS” labels now. :)

  • Tom Brown

    BTW, I’m asking you all this to evaluate whether or not I’d be better off moving some funds back into equities like your analysis suggests. I’ll be 47 this month, and I don’t want to experience another 2008 wild ride with my retirement savings… and I believe the extremist dead-enders in congress (though diminished) are still a threat to our nation’s financial stability… not to mention the unpunished speculators/fraudsters on Wall Street who largely got away with all their shenanigans leading up to 2008 (something for which both Democrats and Republicans are to blame).

  • Geoff

    Make that 1.90%. The mkt no likey the Fed minutes.

  • Wheres Johnny

    Could you adjust for CPI inflation (or any method you deem better). I think it would give us a better look.

  • Cullen Roche

    Your wish is my command.

  • LVG

    Knowing Cullen – he’s not going to mention any specific funds or names here. But the permanent portfolio is an equal weight portfolio so I would GUESS that his comments above mean he wouldn’t be too bullish about a fund that has done well primarily because of the previous 10 year returns in bonds and gold.

  • jaymaster

    Oooohhhh, I like that one too.

  • Pete

    Yeah, central banks dumping gold left and right tends to have a negative effect on prices.

  • Boston Larry

    @Tom, I would advise that you consider dollar cost averaging small fixed amounts into equities from your stable value fund. Spread this out over the next 24 to 30 months. The main reason I would do it gradually is the risk that Europe blows up with a renewed crisis. Or a war with Iran spikes the cost of oil which hurts equities. In this environment, I still would not go higher than 45% or 50% in equities unless there is a big selloff similar to March 2009, when it would make sense to load up.

  • Tom Brown

    Thanks Boston Larry… perhaps I’ll start after March, when we will HOPEFULLY get a break from these never ending fiscal showdowns (for a bit anyway).

    I know Cullen has posted lots of articles about gold, some favorable. I’ve just never been able to bring myself to invest much in it. I did put a little in during the Summer of 2011, but got out again as soon as I could w/o losing money. I wasn’t so lucky with silver, and have about $10k in the SLV fund waiting and waiting for the day when I can get my money back again (thus concluded my brief and small experiment with day trading ETFs from a brokerage account). I just keep going back in my mind to seeing an interview with one of my investing heroes, John Bogle (founder of the Vanguard funds), describing how he almost put some of his money in gold, and then thought better of it. Although, John’s underlying premise supporting his low-cost equity index fund investing strategy (the “efficient markets hypothesis”) is something that I’m not sure I believe anymore. I think that’s based on some faulty neo-classical reasoning.

    What’s your opinion of gold?

  • jaymaster

    And to be fair to the gold fans, that one shows a very clear negative correlation between gold and both equities and bonds. In fact, that’s probably the best illustration of that phenomenon I’ve ever seen.

  • Waitingtoretire

    There is massive marketing of equities and we all know that marketing works. There is no equivalent in precious metals although in the last year it has ramped up considerably.

    Where in the past covered by your graph did conditions exist that are similar to the last 4 years and did those conditions result in an up tick in equities as shown for the last 4 years. Something like a BSR with FED intervention?

  • http://None Midas II

    A beautiful picture for understanding history.

  • Will

    One major problem – couldn’t you have said the same thing in 2008 at the market peak based off of this chart?

  • Will

    With the exception of gold that is – I’m talking about equities…

  • Shane

    The Permanent Portfolio Fund (PRPFX) is different from the Harry Browne Permanent Portfolio (4×25). The HB PP is invested in the same assets in the chart, but the portfolio is designed for individual investors to manage with individual purchases of those assets.

    The Permanent Portfolio fund invests in a number of similar assets (Swiss Francs, for instance — and it cannot change those assets without a majority shareholder vote), but the allocation is entirely different from the do-it-yourself HB PP — it is actually biased towards continuous inflation.

    My point is that the 4×25 HB PP is not supposed to be some managed fund you buy. It’s designed to be very easy to set up on your own.

  • Wheres Johnny

    I agree.

  • CraigR

    Mr. Cullen,

    I present a table of data through the years where these similar assets are used as part of the Permanent Portfolio allocation. CAGR from 1972-2011 is 9.7% with worst losing year in 1981 around -4.1% (nominal). In 2008’s crash the portfolio was only down around -1-2%:

    Most interestingly though, Harry Browne’s Permanent Portfolio concept was the first I’ve really seen that was based on diversification on economic/monetary cycles. It has very strong diversification against significant market risks but also grows one’s life savings in a reasonable amount.