Mr. Market is hurting these days, but what exactly does that mean?
The world’s capital and commodity markets are comprised of multiple asset classes, of course, and they don’t often move in lockstep. The last few months are the exception, but this too shall pass, just as the tendency for bull markets to bloom everywhere during 2002-2007 gave way to something else.
It may not be obvious from casual observation of late, but if we consider longer periods the numbers suggest that owning multiple asset classes is still a worthy pursuit for strategic-minded investors. That may sound counterintuitive given all the red ink this year, but the global market portfolio has held up fairly well over time.
Consider our CS Global Market Index (CS GMI). Although it’s suffered recently, for the past 10 years through November 2008 it’s earned a modest but positive 2.95% annualized total return. (CS GMI is our proprietary benchmark of the world’s major asset classes: global stocks, global bonds and global REITs plus commodities–based on U.S. futures—with everything weighted as per the various market values at the close of 1997.)
Three percent may look unimpressive, but keep in mind that gains over that time frame aren’t universal. US stocks, for instance, are off by an annualized 0.37% during that stretch, as per Russell 3000. Bonds, on the other hand, are in the black for the 10 years through November 2008. The Lehman US Aggregate, for example, is higher by an annualized 5.28% for the decade through last month.

The point is that the major asset classes over time exhibit varying degrees of risk and return, as our chart below reminds, even if sometimes it seems otherwise. The variety is good news for investors who hold a proxy for the world’s market beta, such as something along the lines of CS GMI.

One of the implications of our chart above is that while anything can happen in the short run, over time the global market portfolio is tough to beat. A key reason is that picking winners, month after month, year after year, is tough if not impossible for most folks. Ditto for sidestepping trouble ahead of the crowd.
Note the straight purple line in the chart, which is a linear performance trendline of CS GMI. In the short run, there’s bound to be winners and losers relative to the global market portfolio. That raises the possibility of beating CS GMI by picking asset classes or securities within those asset classes and/or timing some or all of the asset classes. No doubt there are investors who can win this game, although history suggests that most will end up with average or worse results. Indeed, after deducting trading costs, taxes and other active management frictions, the club of winners tends to dwindle over time. Performance numbers by and large bear this out.
That doesn’t mean that active management is always and forever a bad idea. But we must be careful about how we use active management. The devil, in other words, is in the detail.
Indeed, CS GMI isn’t a one-size-fits-all investment concept. Theoretically, CS GMI is the optimal portfolio for the average investor for the infinite future, a description that obviously applies to no one. But CS GMI is a robust benchmark for comparing and analyzing investment strategies. It’s also a great place to begin researching investment options. CS GMI is the default portfolio. The burning questions: How should your portfolio differ from the default portfolio and, more importantly, why?
Focusing on such strategic issues, along with offering deeper analysis of the world’s betas, is the mandate of a newsletter that your editor will soon launch (please stay tuned for details). Does the world really need another investment newsletter? Yes, if it dispenses something that forever seems to be in short supply: strategic investment perspective. And that is exactly what The Beta Investment Report will bring to subscribers. Stay tuned.