As Warren Buffett has observed, if past investment performance could predict future performance, the Forbes 400 would be composed of librarians. Still, reviewing historical returns, some over very long periods, can provide useful guidance about the relative attractiveness of each major asset class and some reasonable expectations about future performance. In this chapter, we analyze historical asset class returns and volatility to explore the implications for your Family Inc. investment strategy.
Much of my thinking on this topic has been influenced not only by my personal investing experiences, but also by the works of Jeremy Siegel and David Swensen, two of today’s leading writers on investment theory. For more information on the data and theoretical underpinnings supporting some of the conclusions regarding asset class behavior, I recommend their writings. This book was written for the practitioner—the Family CFO—and is meant to address what you should do. Jeremy and David provide additional insight regarding why these recommendations are well founded.
Figure 10.1 demonstrates that while equities are significantly more volatile than government bonds and T-bills, they almost invariably perform significantly better over long periods.