As you might expect, volatile asset classes such as emerging markets (EM, as measured by the MSCI Emerging Markets Index) tend to generate both outsized gains and outsized losses. Emerging markets have topped the charts for five of the last 15 years (2007, 2009, 2012, 2017 and 2020) but also bottomed in 2008 and 2011. Loss in 2008. There is a story in it!
Look at the standard deviation of the major asset classes
Franklin Templeton’s latest online charts also include a second version entitled “Risk is more predictable than reward”.
This chart states: “Higher returns often come with higher risks. That’s why it’s important to look beyond returns when selecting a potential investment.” And it ranks asset classes from lower risk to higher risk, and here the results are remarkably consistent over most of the 15-year span between 2005 and 2021.
The lowest risk in each of the periods covered is Canadian bonds, typically with yields between 3% and 4% (a high of 4.77% from 2019 to 2021). And the riskiest are consistently EM stocks, which were listed as the riskiest single asset class from 2005 to 2019, being replaced only by Canadian stocks between 2018 and 2021.
Almost as consistently, global bonds were the second lowest risk asset class, while international equities (MSCI EAFE Index from 2010 to 2017) and Canadian equities (from 2005 to 2011) were the second riskiest.
Look outside the chart
That’s all valuable information, but unfortunately these charts seem to focus almost exclusively on the two major asset classes of stocks and bonds, the very two that are at the heart of all of those popular all-in-one exchange-traded asset allocation funds (ETFs) created by Vanguard developed and soon complemented by BMO, iShares, Horizons and several others in Canada.
Even these seemingly prudent broad-based diversified assets are likely to show disappointing results once these charts are updated for 2022. When a classic 60/40 balanced fund like Vanguard’s VBAL is down 13% through Oct. 31 (I know because I own it), you know we’re in for tough times, even for conservative investors.
For me, the disappointment is that the “why diversify” chart — like most asset allocation (AA) ETFs for some reason — ignores alternative asset classes such as gold or precious metals, real estate, or real estate investment trusts (REITs). Commodities, inflation-linked bonds and cryptocurrencies.