Lately, it’s been hard to find a safety zone in the markets. Most key classes are down for the YTD, 4-week and 2-week periods. Only commodities, oil in particular, have been bright spots. The following charts use these ETFs as proxies for key asset classes: VTI - US stock market EFA - non-US developed stock markets EEM - non-US emerging stock markets VNQ - US equity REITs DJP - global commodities* USO - oil alone AGG - US aggregate bond market * DJP represents the DJ-AIG Commodity Index which is a “balanced” index. It limits any one of the 19 commodities it follows to a 15% weight, and any of the 5 commodity groups to a 33% weight. Since oil has been the overwhelming performer lately, DJP underweights oil in comparison to its world significance. The S&P GSCI Commodity index represents its commodities on a world production basis. For a more detailed ...

We believe it is important to look at return and volatility risk in both absolute and relative terms. For relative performance, we think the 10-year US Treasury bond is a good base to use, because is it relevant to all asset classes.

It relates as well to stocks as to bonds, to real estate, to commodities or to just about any asset class.

Tables of numbers have their place and use, but we also believe a picture is worth a thousand words. We try to put important data into visual formats to make it easier to see meaning. Some people do better with numbers in tables and some do better with pictures. Here is our way of visualizing risk adjusted return.

We call our proprietary way of calculating returns and volatility relative to government bonds “Treasury Indexed Quotients (TIQ)”, a registered trademark.

Each month, we calculate the TIQ for

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One of the principal reasons for asset allocation is risk management. 

Market risk is generally defined as return fluctuation – volatility.  That is different than issue risk (the risk of owning a single stock or bond issue), which includes not only volatility, but also the risk of company bankruptcy or default on bonds.

While most investment professionals understand and take the risk reduction aspect of asset allocation for granted, that is not the case for all investment advisory clients.  We have been asked on more than one occasion, how we know that to be true, and for some evidence of that truth.

There are probably many ways to respond to that question, one of which is with a practical example with real market data.  We have created one such example for this article.

The image below shows the relative weekly return and weekly rate of change of six index investment funds representing six major

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As you select asset classes and class weights for your portfolio, you should take into consideration, among other things, the mean return of those classes over different periods of time.

History is no guarantee of the future, but lack of understanding of the past may result surprising returns. It’s a good idea to do all you can to minimize surprises.

The chart shows the relative 1, 3, 5 10 and 15 year annualized returns for six major asset classes. The key feature to observe is the relative size of the return for each class within each year.

You can see bonds as a low return, but stabilizing asset class. You can see the US market has been weak relative to foreign markets. Commodities have been strong. Real estate did well, until it fell out out bed in a major way during the last 12 months.

A representative (but not exhaustive) list

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