Hidden among everything are the asset classes that will be the winners over the next 1, 5, 10 and even 20 years. We don't know in advance which asset classes will win...or lose.
There is a tendency to look back on history with the idea that we saw it happening. That's a mistake that is very human to make.
Why mention this in the context of asset classes rather than individual stocks or sectors of the economy?
A classic example of this - that severely hurt so many millions of Americans in their retirement savings progress is the "Lost Decade". This is described in the document (click here).
You can see that our model portfolios performed quite well. Was it because we predicted what asset classes would do better than others? No! We remained well diversified as we always do.
However, many U.S. savers, in their 401(k) plans chose to place a majority of their assets in the S&P 500. This is considered a pretty solid move. However, turns out it - 500 stocks that are all US Large stocks - is not diversification - in fact it is all your eggs in one basket.
Academic research shows that there are 4 pervasive factors or dimensions that account for almost all of the stock market movement and they are asset classes. These dimensions are pervasive across multiple markets: USA, Other Developed Countries and Emerging Markets. The numbers for the USA market are:
Stocks beat Bonds - by about 8.2% annualized return (1928-2014).Small Company Stocks beat Large Company Stocks - by about 2.4% annualized return (1928-2014).
Value Stocks beat Growth Stocks - by about 3.6% annualized return (1928-2014).
More profitable company stocks beat less profitable company stocks - by about 4.7% annualized return (1964-2014).
The actual results vary each year, sometime the reverse is true. The trends can go in or out of favor for 10+ years and reverse quickly. The different dimensions are often not in synch which helps even it out. We remain heavily diversified, we just "tilt" - have slightly more assets invested in the Small, Value and Profitable stocks vs. their actual capital weight percentages..