Print Friendly

8 lessons from 80 years of market history

Reprinted courtesy of

To read the original article click here

What do you think is the most important thing that investors do?

Keep their expenses low? Hire a superstar manager? Avoid taxes? Have perfect timing? They’re all significant, but arguably the very most important decision is choosing what kinds of things to invest in. Asset class selection is the fancy name for this.

(Actually, setting aside some money to invest in the first place is the absolute most essential step. But if you don’t do that, then you’re not even an investor.)

In the stock market, you can invest in popular growth stocks or unloved value stocks. You can invest in big companies (large-cap) or small companies (small-cap). You can invest in U.S. stocks or in international stocks; you can also invest in emerging markets stocks and real-estate investment trusts.

According to the experts, more than 90% of your ultimate investment return depends on your choices of asset classes. (This assumes that you invest money and leave it invested. If you move in and out of your investments, then your results are totally unpredictable.)

The table below shows eight decades of returns for the four most important U.S. equity asset classes: Large-cap blend stocks (represented by the Standard & Poor’s 500 Index SPX, +0.52%  ), large-cap value stocks, small-cap blend stocks and small-cap value stocks.

(The “blend” asset classes are approximately 50/50 growth and value; the “value” asset classes are made up almost exclusively of value stocks.)

Many people think the S&P 500 index represents “the market,” but it doesn’t. In fact, over the long haul each of the other three asset classes outperforms this index by a long shot, as you will see from the right-hand column in the table.

I could have made a table with single-year figures, but for most readers that would be far too much data. One reason I chose 10 years is a famous maxim from Warren Buffett: Don’t buy something unless you would be willing to hold on to it if the market were shut down for 10 years.

All four of these asset classes pass that test for me. But as you can see, from 1930 through 2013, some of them were substantially more rewarding than others.


The following are 10-year annualized percentage returns for the S&P 500 Index, U.S. Large Cap Value, U.S. Small Cap and U.S. Small Cap Value. Returns are in %s.

 Asset Class: 30-39 40-49 50-59 60-69 70-79 80-89 90-99 00-09 1930-2013
S&P 500  Index -.1 9.2 19.4 7.8 5.9 17.5 18.2 -.9 9.7
Large-Cap Value  -5.7 12.7 18.4 9.4 12.9 20.6 16.8 4.1 11.2
Small-Cap 2.3 14.9 19.2 13.0 9.2 16.8 15.5 9.0 12.7
Small-Cap Value   -2.6 19.8 19.6 14.4 14.4 20.1 16.2 12.8 14.4

Includes reinvestment of dividends. Source: Dimensional Fund Advisors.

Whenever I study a table of investment returns, I look for important lessons I can learn so that I’m not surprised by what the market does.

Here are eight things that pop out at me from this table:

  • It is obvious that, when measured in 10-year increments, the market was up most of the time. The table shows 32 10-year returns; 28 of them were positive, and only four were negative (and three of those four occurred way back in the 1930s).
  • The market can have many successful decades in a row. Most investors remember that the 1990s produced very high returns for equities, but this table shows even better returns in the 1980s.
  • Leading and lagging asset classes sometimes change places. This makes it hard to pick just one and be confident it will always be on top. In the 1960s, small-cap and small-cap value stocks clearly led the way. They did the same from 2000 through 2009. However, the 1970s were led by large-cap value and small-cap value. In the 1950s, 1980s and the 1990s, every asset class in this table produced double-digit returns — and the 1940s came mighty close.
  • The most consistent high-performance winner was small-cap value stocks. Except for the 1930s, this asset class produced decade-long gains that were always over 12.5%.
  • In only one decade, the 1930s, did this group fail to walk away with a profit. And if you adjust it for inflation, that group’s returns were actually positive: up 1.4%.
  • The first 10 years of this century has been regarded as a “lost” decade for stock investors, largely because of large-cap growth stocks and a couple of serious bear markets. But in that decade, a portfolio that was divided equally among these four asset classes wound up being a moneymaker, with an average gain of 6.7%.
  • Over the last 80 years, “beating the market” has been very easy if you regard the S&P 500 Index as the market.
  • The adage that investors get paid to take risks seems to be working just fine. Large-cap value stocks are riskier than the S&P 500, and they paid more. Small-cap growth stocks are riskier than large-cap value stocks, and they paid more. Small-cap value stocks are the riskiest among these asset classes, and they paid the highest long-term return. 

Because of the third lesson I outlined, it’s impossible to know which asset class will do best next week, next month, next year or even next decade. But there’s magic in combining all four of these in one portfolio. Over 84 years from 1930 through 2013, this Group of Four boosted the annual return from 9.7% to 12%.

If you think that’s not a big deal, here’s the math: A $1,000 investment in 1930 (equivalent to $14,084 in today’s dollars) grew to $2.4 million at 9.7% — or to $13.6 million at 12%.

Richard Buck contributed to this article.