D<\/span>uvet day here at Monevator<\/em> as we update our asset allocation quilt with another year\u2019s worth of returns.<\/p>\n The resulting patchwork reveals the fluctuating fortunes of the major asset classes across a decade, and invites a question\u2026<\/p>\n Could you predict the winners and losers<\/strong> from one year to the next?<\/p>\n The asset allocation quilt ranks the main equity, bond, and commodity sub-asset classes for each year from 2015 to 2024 from the perspective of a UK investor<\/b> who puts Great British Pounds (GBP) to work. <\/span><\/p>\n We\u2019ve also squeezed in money market funds<\/a> this year. These can be thought of as cash-like, if not quite as safe as money in the bank. <\/span><\/p>\n Here\u2019s what you need to know to read the chart:<\/span><\/p>\n While our chart may look like the worst pullover pattern ever, it does offer some useful narrative threads.<\/span><\/p>\n For starters we can see investing success is not as simple as piling into last year\u2019s winner. The number one asset in one year typically plunges down the rankings the next. A reigning asset class has only once held onto its crown for two consecutive years \u2013 broad commodities<\/span><\/a> achieving the feat across 2021 and 2022.\u00a0<\/span><\/p>\n Long periods of dominance are possible \u2013 see US equities<\/span><\/a>. <\/span>S&P 500 returns have only dropped into the bottom half of the table once in the past decade (in 2022), and stand head and shoulders above the rest in the ten-year return column. <\/span>If you started investing after the Global Financial Crisis then you have US stocks to thank<\/a> for the bulk of your growth.\u00a0<\/p>\n The danger is such patterns gull us into thinking it will always be thus. <\/span>Whereas in reality, the asset allocation quilt for, say, 1999 to 2008 would have looked very different. <\/span>US stocks lost 4% per annum over that ten-year stretch.<\/span><\/p>\n I suspect S&P 500 tracker funds were a touch less popular back then!<\/span><\/p>\n Indeed, US stocks have fallen behind<\/a> the rest of the world many times over the last century.\u00a0<\/p>\n And credible voices warn\u00a0we can\u2019t expect<\/span> US large caps to rule forever. Albeit such commentators simultaneously acknowledge that they cannot predict when regime change may come.<\/span><\/p>\n (We\u2019ve written more about this problem<\/a> and what you might do about it.)<\/span><\/p>\n Gold<\/a><\/span> looks attractive as the leading non-equity diversifier in our chart. Its ten-year return of 10.2% is incredible for an asset class that theorists claim has no intrinsic value.\u00a0<\/span><\/p>\n It\u2019s volatile stuff though. When we first created this asset allocation quilt in 2021, gold\u2019s ten-year return stood at zero after inflation\u00a0<\/p>\n I remain personally ambivalent about gold.<\/p>\n If you\u2019re a young accumulator you don\u2019t really need it. However aging wealth-preservers may be grateful for gold\u2019s ability to improve risk-adjusted portfolio returns<\/a>.<\/p>\n And the yellow metal may mitigate sequence of return risk<\/a> as part of a portfolio designed<\/a> to cushion the downside.\u00a0<\/p>\n It\u2019s notable how a truly awful few years can completely contaminate our perceptions about an asset class.\u00a0<\/span><\/p>\n Bond\u2019s ten-year returns were perfectly satisfactory back in 2021. But they have taken a drubbing since. <\/span><\/p>\n Now UK government bonds (gilts) look like a liability by the light of the last ten years.<\/span><\/p>\n Yet higher bond yields<\/span><\/a> are almost certain to deliver better returns<\/span><\/a> from bonds over the next decade, provided inflation is tamed and the global political outlook doesn\u2019t go from bad to worse.\u00a0<\/span><\/p>\n Over the long run, ditching a key diversifier like bonds is likely to prove a mistake. Splitting your defensive measures between nominal bonds, index-linked bonds, cash, commodities, and gold does make sense though.\u00a0<\/p>\n A major Monevator<\/em> theme over the past couple of years has been to improve our coverage of the defensive asset classes \u2013 delving deeper into how they work, when they work, and what the risks are.\u00a0<\/p>\n Take a look at:<\/p>\n I appreciate that\u2019s a lot of links. But the more you know, the less the disco dance floor of asset returns in our chart above will cause you a headache.\u00a0<\/p>\n The bond crash has caused many investors to simply replace bonds with cash.<\/p>\n We think of cash as an asset class like any other and so we\u2019ve introduced it to the table, using a money market ETF as a proxy.\u00a0<\/p>\n More than any other asset class, cash (here our money market ETF) lurks in the lower half of the table.\u00a0<\/p>\n That\u2019s no surprise. The job of cash is to be liquid and stable, not to make lurching advances and retreats like the more temperamental asset classes.\u00a0\u00a0<\/p>\n On the ten-year measure, cash looks okay. But over the long-term it\u2019s delivered only about half the return of longer bonds.<\/p>\n Commodities<\/a> have crept up the ten-year rankings every year since we began the asset allocation quilt. Now they\u2019re up to fourth place and stand in line with their expected real return of about 3%.\u00a0<\/p>\n Commodities present a fascinating dilemma.<\/p>\n They\u2019re the one asset class that positively thrives when inflation melts bonds and equities. Commodities are\u00a0also a tremendous diversifier<\/a> due to their lack of correlation<\/a>\u00a0with equities, bonds, and cash.<\/p>\n \u00a0<\/span>But you\u2019ll need testicular fortitude to live with the volatility of raw materials.<\/span><\/p>\n Commodities have inflicted losses for five out of the last ten years, but redeemed themselves with spectacular 30%+ gains on three occasions \u2013 most critically when inflation lifted off in 2021 and 2022.\u00a0<\/span><\/p>\n Commodities had a surprisingly quiet year in 2024, delivering a decent 7% return thanks to a late comeback in the final quarter.<\/p>\n Our asset allocation quilt suggests they\u2019re rarely so moderate. Most years you\u2019ll love or loathe them.\u00a0<\/p>\n Inflation-linked bonds still make sense despite their desperate showing in 2022.<\/span><\/p>\n We\u2019d been warning for years before that mid to long duration UK linker<\/span> funds were badly flawed<\/a>. <\/span>But even our preferred short-duration inflation-linked funds<\/a> haven\u2019t kept pace with inflation, due to the massive hike in yields<\/a> that accompanied the 2022 bond rout<\/a>.\u00a0<\/span><\/p>\n One solution is to hedge rising prices with individual index-linked gilts which \u2013 if bought on today\u2019s positive real yields and held to maturity \u2013 will protect your purchasing power against headline inflation.\u00a0<\/span><\/p>\n We\u2019ve recently written about how to do that:\u00a0<\/span><\/p>\n Note that to get ten years worth of returns, our asset allocation quilt currently tracks <\/span>Xtracker\u2019s Global Inflation-Linked Bond ETF GBP hedged. This is a problematic mid to long duration fund, as discussed!<\/span><\/p>\n However you weave your response to the challenges of investing, the asset allocation quilt makes it plain that the best way to anticipate the future is to be ready for anything.\u00a0<\/span><\/p>\n Buy your asset classes on the cheap after they\u2019ve taken a kicking, grit your teeth while they\u2019re down, then reap the reward when their day \u2013 or year \u2013 comes around again.\u00a0<\/span><\/p>\n Finally, as uncertainty abounds, let\u2019s be thankful that if you banked on the default position of global equities then you did just fine.<\/span><\/p>\n In fact, more than fine over the last decade. <\/span>That<\/span> 11.5% annualised return \u2013 8.5% in real terms \u2013 is excellent.<\/span><\/p>\n Take it steady,<\/p>\n The Accumulator<\/em><\/p>\nAsset allocation quilt 2024<\/h2>\n
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Shady business<\/span><\/h2>\n
The golden thread<\/span><\/h2>\n
A chequered past<\/span><\/h2>\n
Getting defensive<\/h4>\n
The colour of money\u00a0<\/h2>\n
Material matters<\/h2>\n
The missing link\u00a0<\/span><\/h2>\n
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Stitch in time\u00a0<\/span><\/h2>\n