Asset classes & rolling returns

Previously we have studied rolling returns for various time periods for the stock market from 1926-2016. I have included that chart below once again. Here's what the data told us:

99.8% of 15-year periods were positive.

94.6% of 10-year periods were positive.

87.4% of 5-year periods were positive.

74.7% of 1-year periods were positive.

Today I want to continue along this train of thought and look at another set of data. The chart above shows 1, 5, 10, and 20 yr rolling returns from 1950-2018 for three different type of portfolios: 1) Stocks 2) Bonds 3) 50% Stocks/50% Bonds. Stocks are green, bonds are blue, and the 50/50 portfolio is gray. This chart shows the volatility of each type of portfolio over the various time periods, and serves as a very good visual indicator of the truth I discussed in previous posts: namely, that as investors we have a greater degree of certainty about the future than we have about the present.

Of note: stocks averaged an 11% total return in this data set, and perhaps even more impressive: there was not a single a 20-year time period where stocks returned less than a 6% average annual return . Sure, you say, given enough time, we know stocks are worthy investments. But what about shorter time frames? Well, there was never a 10-year time frame where stocks were down more than -1%. There was never a 5-year time frame where stocks were down more than -3%.

Given the average person's perspective on the riskiness of the stock market, I think most people would find these numbers quite reassuring. (Especially when compared to the other option most people employ: being "safe" by putting our money in savings accounts and CDs, which all but guarantee that our hard-earned savings will get outpaced by inflation and therefore earn negative real returns .)

There is more to glean from this chart, but we will save those points for the future. For now, we take this away: all asset classes display various degrees of volatility, with equities displaying a greater degree than bonds. Nevertheless, equities are essential in our quest for positive real returns, in as much as they have historically rewarded the investor who shows patience during short-term volatility in order to reap the rewards of long-term investment growth.

Glossary :

Volatility : can be defined various ways, but for our purposes right now we can say volatility is a measure of the dispersion of returns of a given security or asset class.

Asset classes : equities, fixed income, and alternative investments are each a type of asset class

Security : a tradeable financial asset that is purchased to be held for investment. A stock is an example of a security.

Real return : return after inflation

Nominal return : return without taking into account inflation

Equities : another way to say stocks

Fixed Income : another way to say bonds

Alternative Investments (or "alternatives") : investments like private equity, private debt, and real estate