In December, markets declined. Bonds fell the least, followed by US large cap and international stocks. US small cap stocks declined the most. Over the course of the year, all four indexes have positive returns, with many stocks having a great year.
2024 Review
Happy New Year! As investors, January is a natural time to look back on what happened last year, as well as look forward to what may transpire in 2025. The following chart from JP Morgan gives insight into portfolio performance over time. It shows annual performance, average performance, and volatility for the following asset classes:
- US Large Cap
- US Small Cap
- Real Estate Investment Trusts (REITs)
- High Yield Bonds
- A diversified portfolio (Asset Allocation)
- International Developed Markets (DM Equity)
- International Emerging Markets (EM Equity)
- Bonds (Fixed Income)
- Cash
- Commodities
There are numerous lessons investors can learn from this chart:
- Diversification Helps – The biggest determinant of investing success is the amount of time spent investing. Investors with 20 or 30 years of experience encounter many different market cycles and get used to market volatility. They also benefit from decades of compound interest – 10% of $1 million has more impact than 10% of $10 thousand. An asset allocation portfolio (in white) will never be the best performer, but it will also never be the worst. This makes it more likely for investors to stay invested longer and reap the benefits of time.
- Risk and Return are Linked – The far left columns show the average asset class performance from 2010-2024. Cash and fixed income have low returns and low volatility/risk. In order to achieve higher returns, we must accept and embrace higher levels of volatility. While not all investors need to have a high risk tolerance, in the long run, too low of a risk tolerance simply means lower returns. Another benefit of having some bonds and cash in a portfolio is that it allows investors to take more risk with the rest of their portfolio, which benefits them over time.
- The Future is Uncertain – Perhaps the most obvious visual impression of the graph is its randomness. Colors are everywhere – we simply don’t know if past performance will persist into the future or not. While there are ways of analyzing investments rationally, investors are always dealing in probabilities rather than certainties. Because of the uncertainty of outcomes, the decision making process is important – how do we decide what to invest in? This is one of the benefits of working with a professional advisor.
We look forward to serving you in 2025. Please contact us if you would like to discuss any of these topics in more detail.
