Why You Want to Own the “Bridesmaids” of Asset Classes

By Grant Wasylik, analyst, Palm Beach Daily

Legendary NASCAR driver Dale Earnhardt Sr. once said, “Second place is just the first-place loser.”

But what if probability showed that finishing in second place… would make him the statistical favorite to win the next race?

He might’ve changed his tune.

Well, in the stock market, second place is the odds-on favorite for next year’s first place when it comes to asset classes.

In fact, asset allocators would’ve been handsomely rewarded by following one simple strategy over the last 47 years.

It really couldn’t be much easier to follow… So in today’s issue, I’ll tell you what it is – and more importantly, why you should implement it in the coming days.


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The Bridesmaid Strategy

It’s called the “bridesmaid” strategy. My colleagues at The Leuthold Group developed the method.

If you haven’t heard of The Leuthold Group, it’s one of the top financial institutional research firms in the world. (You can learn more about Leuthold here.)

Now, it’s crunched the numbers by measuring the performance of seven asset classes since 1973:

  • Large-cap stocks (S&P 500)
  • Small-cap stocks (Russell 2000)
  • Foreign stocks (MSCI EAFE Index)
  • Real estate (FTSE Nareit Composite REIT Index)
  • Commodities (S&P GSCI)
  • Gold
  • U.S. Treasuries (U.S. 10-year Treasury Bonds)

And according to its research, the previous year’s runner-up generally outperforms the other six the next year.


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Here’s how the approach works…

You start with these seven major asset classes. And you observe each one’s returns from the prior year. Then, you buy the second-best performer (the “bridesmaid”) and hold it over the next 12 months.

And as you can see in the chart below, picking the “bridesmaid” hands you the highest return over the long haul…

This bridesmaid strategy has returned an annualized 14.8% over the last 47 years. In comparison, the S&P 500 has only returned an annualized 10.5% during the same timeframe.

Now, this momentum approach isn’t foolproof…

For example, gold finished second in 2018, making it the 2019 bridesmaid. Yet gold finished in sixth place last year. But on the bright side, gold was still up nearly 19% in 2019 – its best performance since 2010.

Remember, the long-term results matter most. And it’s hard to find active fund managers who beat their benchmarks in the long term.

In fact, S&P Dow Jones Indices reports that only 12% of all domestic funds beat the U.S. stock market over the last 15 years.

But the bridesmaid strategy has eclipsed the S&P 500’s returns in 31 of the last 47 years – for an impressive 66% win rate.

So let’s take a look at what history says is the best bet for 2020…


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The Top Choice for 2020

According to 2019’s returns, this year’s bridesmaid is REITs (real estate investment trusts)…

Asset Class

2019 Return

Large Caps

31.5%

REITs

28.1%

Small Caps

25.5%

Foreign Stocks

22.7%

Commodities

17.6%

Gold

18.8%

10-Year U.S. T-Bonds

8.5%

Since REITs were the silver medalist in 2019, they’re the top choice for 2020. It’s that simple.

If you’d like to get some exposure to REITs, consider an exchange-traded fund (ETF).

You can use the Vanguard Real Estate ETF (VNQ) or the Schwab U.S. REIT ETF (SCHH) for 2020. They’re the top two ETFs based on assets in the sector. And they have ultra-low expense ratios of 0.12% and 0.07%, respectively.

If you want to really benefit from this strategy, you need to act now. This is an annual rebalancing strategy. And we’re already in the second month of the year.

So if you want to implement the bridesmaid strategy, take a small position today and let it ride over the next 11 months. And be sure to keep this bridesmaid strategy in mind when you’re rebalancing your portfolio at the beginning of each year.

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