Today’s quiz has to do with asset category returns. The first decision an investor must make is choosing what to invest in. Stocks? Bonds? Real estate? Gold? Futures contracts? Persian rugs? Pork bellies? Several large studies have found that the investor’s answer to the question of which asset category, or categories to invest in is of major importance, likely the most important decision the investor makes. A multitude of economic factors will determine which asset category does best during a given period, and anticipating those factors and the subsequent category returns is a challenge not easily met. In fact, many in the academic community would say it is a challenge that is impossible to meet. Certainly some investors guess correctly some of the time, but over the long term the typical market timer or sector rotator experiences average or below average investment returns relative to the risk assumed.
So, today’s quiz asks the question, “Which asset category did the best in each of the past 15 years and which category did the worst?” The categories in question are: small stocks, large stocks, international developed stocks, emerging-market stocks, intermediate-term government bonds, intermediate-term corporate bonds, high-yield bonds, and commodities. The years in question are 1999 through 2013. Even with the benefit of hindsight, I’m betting that you will score less than 50%. Ready? Pencil and paper in hand? Write down the year starting with 1999 and to the right put down the asset category that you think did the best and the one that did the worst. Of course, this being the 21st century and all, you might want to open up a quick electronic spreadsheet to create a quick table with your answers.
After you have completed the quiz you may click here to view a table (quite colorful actually) with the correct information. Even after considering our tendency toward hindsight bias you are likely to question the efficacy of market timing strategies once you have taken this little quiz. Also, please note the various returns over the entire period. You will likely be surprised.
Topics for future blog entries will include “longevity insurance” and three recent books of interest – The Second Machine Age, The Lights in the Tunnel and Our Final Invention.
Please take a look at our new website. The address is the same, www.FPAI.net. Also, you will note that the address bar shows up in green. This is a security thing. It means that you are not being spoofed. It means that you truly are at the web address that you intended to reach. We hope that you like the new website, and we welcome any comments.
And finally, Iris, age 67 tells the following story:
I feel like my body has gotten totally out of shape, so I got my doctor’s permission to join a fitness club and start exercising. I decided to take an aerobics class for seniors. I bent, twisted, gyrated, jumped up and down, and perspired for an hour. But, by the time I got my leotard on, the class was over.