Next month will mark the ten year anniversary of the Lehman Brother’s bankruptcy, a shocking and unexpected event that helped catapult what had been a relatively mild recession and bear market into the Global Financial Crisis we all remember too well. And while all tropical storms get their own proper name, very few recessions do! From our vantage point ten years later, there can be no doubt that the GFC was truly something historic.

From the depths of the stock market bottom in early 2009, markets have rebounded strongly, but unevenly. Here is a sampling of annualized asset class returns from January 2009 – July 2018:

Asset Class
Annualized Total Returns
US Stocks
Nasdaq 100 Index
US Large Cap Growth
US Large Cap Value
US Small Cap Stocks
US Small Cap Growth
US Small Cap Value
Int’l Developed Stocks
International Large Cap Value
International Small Cap
Emerging Markets

While every asset class shows a strong positive return, there are some notable divergences:

  • The US stock market has strongly outperformed international developed markets for the last ten years. The US outperformance has continued into this year as well.
  • Within the US market, growth has outperformed value by an average of over 3% for the past ten years. (Small capitalization stocks have slightly outperformed large cap stocks.)
  • A highly concentrated position of US large cap technology stocks, represented by the Nasdaq 100 index above, outperformed the total US market by a wide margin.
  • Within the foreign developed stock markets, the ‘value’ factor did outperform the ‘growth’ factor, and international small cap stocks outperformed international large stocks. A win for Evidence-Based Investing.
  • Emerging market companies also underperformed the US market and emerging growth stocks outperformed emerging value stocks over the last ten years.

Needless to say, some of these performance figures are not what evidence-based investors like to highlight, because they appear to promote all the ‘wrong’ investing behaviors!  In fact, one might argue that “poorly-designed” portfolios – those that eschew diversification, vastly overweight the US, and skew toward large cap growth holdings — have performed much better than “well-designed” portfolios since 2008. Is it time to throw Modern Portfolio Theory out the window and just buy Netflix?

Of course not — Evidence-Based Investing is not simply an attempt to maximize returns in every period;  it’s about controlling risk as well. The academic evidence for how to create a well-designed, efficient portfolio (including diversification across asset classes, countries and securities, as well as tilts toward small and value companies) is robust even against ten year periods like the one that will conclude in 2018. The factors that make a good portfolio are evident in multiple time periods going back to 1926, and have been observed in most other markets around the world.

It’s also important to stress that US market performance for the last ten years has been an outlier – because ‘value’ has outperformed ‘growth’ in 84% of all rolling ten year periods. But that leaves a 1 in 6 chance that growth will outperform in any given decade, as it has since 2008. Internationally, the value factor has fared even better, outperforming growth in about 95% of rolling ten-year periods.

If there is one lesson that the last ten years can teach us, it is that these factors do not work in every period, and dry spells of even a decade (or more) are possible. But as evidence-based investors, we know that markets have rewarded patient, long-term investors. The factors which have led to superior portfolio performance over the long run should continue to shine in the future – for US value companies, we may just need to be patient a bit longer.