ARIS Insights: The Best Asset Class

What is going to be the best performing asset class over the next 3-5 years? This is a question that “experts” frequently answer with a high level of conviction. In our view, it is dangerous for investors to overly rely on such predictions for two main reasons:

  1. The best asset is highly dependent on the economic climate; and
  2. Guessing how the economy is going to evolve is very difficult.

Dependence on the Economic Climate

The economic environment largely explains asset class performance. The logic is straightforward and intuitive. The best asset class in an economic downturn is different from the best in an economic boom. Likewise, if inflation suddenly spikes then certain assets are biased to do well, while a fall in inflation benefits other market segments.

Table 1 provides a summary of the economic climate in which each major asset class tends to outperform.

Table 1: Economic Bias of Asset Classes

To prove the point with historical data, Table 2 shows cumulative asset class returns since 1973, broken down into distinct economic periods. The table also lists the dominant driver to help you connect the economic bias of each asset class to how it performed during the period (note that there are additional influences that also impact prices so the correlation won’t be perfect).

Table 2: Asset Class Performance in Different Economic Environments(1)

You can observe the relationship between asset class returns and economic outcomes, as well as the constant changes in leaders and laggards. Notice the wide swings in asset class returns as the environment changes. Often times the best asset in one environment becomes the worst in the subsequent environment (and vice versa). This highlights the danger of investing in those asset classes that have recently performed best. Sadly, human emotion leads most investors to adopt this exact approach.1