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The following table shows the annual returns for the total U.S. stock market, the total international developed Ex-U.S. stock market, and the total U.S. bond market since 1987:
In general, U.S. stocks significantly outperformed both international stocks and U.S. bonds during this 31-year time period. Also, U.S. bonds delivered the same annual returns as international stocks with far less volatility:
It’s also interesting to note the relationship between these asset classes:
- The annual returns of U.S. stocks and international stocks are positively correlated. When U.S. stocks go up, international stocks tend to go up as well.
- The annual returns of U.S. stocks and U.S. bonds are uncorrelated.
- The annual returns of international stocks and U.S. bonds are slightly negatively correlated. When international stocks go up, U.S. bonds tend to go down.
We can use a correlation coefficient to quantify exactly how correlated the annual returns between any two asset classes actually are:
A correlation coefficient above zero indicates that two asset classes have a positive relationship: when one goes up, the other tends to go up as well. A correlation coefficient below zero indicates that two asset classes have a negative relationship: when one goes up, the other tends to go down.
A correlation coefficient of 1 would mean that two asset classes are perfectly positively correlated and a correlation coefficient of -1 would mean that two asset classes are perfectly negatively correlated.
The scatterplots below show the annual returns for different combinations of these asset classes. Each dot represents a single year.
There are some neat observations we can draw from these plots. Namely, during the 31-year period from 1987 to 2017:
- There was only one year when U.S. stocks had negative returns and international stocks had positive returns in the same year (1994, U.S. = -0.2%, Int’l = 9.8%)
- There was only one year when both U.S. stocks and U.S. bonds had negative returns (1994, U.S. stocks = -0.2%, U.S. bonds = -2.7%)
- There was never a year in which both international stocks and U.S. bonds both had negative returns.
Here’s how a one-time $10,000 investment at the beginning of 1987 in each of these three asset classes grew over time:
A $10,000 investment in U.S. stocks grew to an unbelievable $207k while the same investment in either U.S. bonds or international stocks grew to only $60k.
And here’s how an annual $10,000 investment at the start of each year since 1987 grew over time:
Someone who invested $10,000 each year in U.S. stocks would have accumulated $1.9 million by the end of 2017. Someone who did the same with international stocks would have accumulated $820k, and someone who did the same with U.S. bonds would have accumulated $783k.
Technical notes: Keep in mind that this analysis covers a specific time period: 1987 – 2017. It’s possible that each of these three asset classes could have performed better or worse during different time periods. I chose to analyze this data because it was readily available from Portfolio Visualizer.
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