Let’s also take a moment to reminisce about some of the changes to the business environment that have occurred over the last century. Henry Ford installed the first moving assembly line, indoor plumbing and home electrification became standard, women joined the work force, infant mortality rates declined dramatically in many parts of the world…. We could go on and on, but instead we leave it to you to take a few moments to reflect.
This is not to say that technological, social, and health-related advancements will not continue to occur over the next century.4 However, it is fair to pose a question about the marginal importance of future advancement relative to the past. Asked in a practical way, if you had to make a choice between indoor plumbing (from a hundred years ago) or your smart phone (from a decade ago), which one would you choose? Which had a larger impact on society as a whole? Can we expect the same financial tailwinds from future advancements? Only time will tell.
The Past Decade: 2005–2014
Moving to more recent times, the past decade has seen ultra-low interest rates, a housing bubble, the Global Financial Crisis, the Great Recession, global unemployment at levels not seen in decades, and now a slow and geographically uneven global economic expansion. With all that turmoil, surely the 60/40 portfolio suffered mightily during this time! Well, actually, no. The 60/40 portfolio earned a respectable annual nominal return of 7.2%, or 5% real, over the past decade.
Of course 60/40 equities and bonds is not the only choice for investors these days. What happens if we expand the opportunity set? From Figure 3 we can see that, on a real return basis, the 60/40 portfolio outperformed 9 of 16 core asset classes, many of which also enjoyed relatively strong performance. (Note that when we combine assets classes into a single graph, as we do here in Figure 3 and later in Figure 6, we choose to display real returns because investors’ objectives are more often real than nominal.)