Asset Allocation with Inherent Uncertainty .

Strategic asset allocation provides greater flexibility to bend with asset class movement

Asset Allocation with Inherent Uncertainty

By Nasdaq Dorsey Wright /

When planning for the future, investors are faced with the uncertainty of returns that different asset classes will provide in the years and decades ahead.  A review of the past reveals that asset classes don’t have consistent returns from one year to the next or even from one decade to the next. 

The table below summarizes the annualized returns of five different asset classes---U.S. stocks (S&P 500), U.S. Bonds (Barclays Aggregate Bond Index), International stocks (MSCI EAFE), Commodities (GSCI Commodity Index), and Real Estate (FTSE NAREIT All REIT)—from 12/31/1975 to 10/31/2018.  The top row shows the annualized return of each of the five asset classes over the entire period, while the subsequent rows below show the annualized return for the asset class for each of the periods indicated.  The highest returning asset classes for the specified period is shaded in green while the worst performing asset class for the period is shaded in red.


Source: FactSet.  All returns are inclusive of dividends and interest, but do not include transaction costs.  Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.   

Shown below are some key observations from this data:

  • Over the entire nearly 43 year period of time of this study all five asset classes generated positive returns---Real Estate had the highest annualized return while Commodities had the lowest.
  • Asset classes can have extended periods of high returns and can also go through extended periods of low or even negative returns.

There are all kinds of other observations that could be made with this data.  For example, one could look at the correlation of returns of the different asset classes; one could look at the standard deviation of returns; one could look at the peak to trough declines of performance for each of these asset classes.  However, for the purposes of this article I am going to stop the observations there.  Just with those two key observations investors have been armed with powerful insights about what has happened in the past and what that might suggest about what may happen in the future.

Key implications for construction of an asset allocation:

  • There may be benefits for investors to not limit themselves to just one or two asset classes when constructing an asset allocation. Why not give yourself the ability to invest in a broad range of asset classes?
  • Reasonable people can disagree about whether or not the data above is an argument for strategic asset allocation which essentially argues for a broadly diversified (and largely passive) approach to asset allocation. The proponents of a passive approach to asset allocation will argue that the future is unknowable and therefore it is best to just broadly diversify.  Proponents of tactical asset allocation assert that it may be possible to overweight asset classes while they are in favor and underweight asset classes while they are out of favor. 

History shows that asset classes move in and out of favor.  Those asset classes that have had the best returns over the past decade may or may not have the best returns in the future.  Before investors can begin to make an informed decision about how to approach the construction of an asset allocation that is appropriate for them, it is imperative that they have some sense of the historical performance of different asset classes. We at Nasdaq Dorsey Wright employ a relative strength-driven approach to tactical asset allocation for a number of our strategies with the goal of seeking to capitalize on those asset classes that are in favor while seeking to minimize exposure to those asset classes that are out of favor and we are happy to discuss this approach with any who would like to learn more.

Nasdaq Dorsey Wright has eight Systematic Relative Strength Portfolio Strategies to fit a number of investment objectives. To see a list of where these strategies can be accessed or to download a performance report, please visit our website www.business.nasdaq.com/sma-uma.


The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  The information contained herein has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable (“information providers”). However, such information has not been verified by Dorsey, Wright & Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein. DWA and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded). Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made. You should consider this strategy’s investment objectives, risks, charges and expenses before investing. The examples and information presented do not take into consideration commissions, tax implications, or other transaction costs.

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