There are many ways to model expected returns. Unfortunately, not one is even close to being foolproof, which inspires looking at multiple measures of market activity. That includes monitoring relative returns through time among the major asset classes, one of several analytical tools employed in the search for strategic perspective in each issue of The Beta Investment Report.
As a basic example, consider the chart below, which graphs differences in rolling 3-year annualized total returns between U.S. stocks (Russell 3000) and U.S. bonds (Barclays Aggregate), foreign stocks (MSCI EAFE) and REITs (Wilshire REITs). For instance, for the three years through the end of June 2009, the Russell 3000 suffers an annualized 8.3% loss vs. a gain of 6.4% for the Barclays U.S. Aggregate Bond Index. The result is that equities are under water by nearly 15 percentage points relative to bonds (red line). By comparison, stocks have bested REITs over the past three years, with a positive spread of more than 11 points (green line). Domestic vs. foreign stocks, meanwhile, are generally neck and neck as of the past three years through last month (black line).
What’s the point of looking at returns in this fashion? It offers some perspective on return on a relative basis. No, it’s not a silver bullet, nor does it offer a quick road to easy money. It is, however, valuable when considered in context with other variables.