(Click to enlarge)
The above chart is known as the “Periodic Table of Investments” and illustrates the previous 10 years annual performance of eight different asset classes. The asset classes represented in this particular chart are Large Cap Equities, Mid Cap Equities, Small Cap Equities, International Equities, Emerging Market Equities, Commodities, Bonds, Inflation Protected Securities, and Cash. As you can see from the chart above, over the past 10 years, each asset class has had years where it has performed well and years where it has lagged.
This one chart illustrates many of the concepts and dangers that successful investors must navigate: intelligent diversification, chasing performance, rebalancing, and remaining invested in the markets.
A diversified portfolio is one that has assets spread across several asset classes. Intelligent diversification allows you to limit potential losses when one asset class underperforms the rest by participating in the gains of asset classes that perform well.
A common problem many investors face is chasing performance which is buying investments that have done well in previous years and selling what hasn’t done well. This problem may be exacerbated by some commission based relationships where the “hot” investment or area is always being sold. It is much easier selling an investment by citing its recent outperformance but as illustrated above, quite often recent outperformance does not equal long term outperformance. Conversely, sometimes the worst performing asset class one year can be a top performer the next.
Rebalancing a portfolio allows an investor to remain on course with their asset allocation so the portfolio does not get out of whack and begin to take on more or less risk compared to the investor’s risk appetite. When one asset class performs really well, a portfolio can become overweight in that area and will want to sell a portion of the funds and buy the underperformers in the portfolio thus getting the portfolio balanced back to the original allocation.
We believe remaining invested within asset classes is always the best long-term strategy for investors. As illustrated in the chart, if you decide to pull money out of the markets, you may be correct in the moment but you must follow up with additional correct decisions. For even the smartest investment managers in the world, it is nearly impossible to time the market. The old saying is, “It’s not timing the market, it’s time in the market.”