My Favorite Investment Chart

Regular readers of D-I-Y Investor know that the BlackRock "Asset Class Returns" chart is my favorite investment chart.  In fact, one of the first things I do with new clients is go over its main points.  IMHO, time spent with this chart can be more valuable than spending days reading investment books or even blogs.  It gets you past all the salesy mumbo jumbo of the investment world and looks at what actually happened.  It is a great place, IMHO, to start to think about what can happen and how to prepare.

Source: BlackRock

 CLICK IMAGE TO ENLARGE

If I was teaching a course (actually I will be doing an online book discussion of Millionaire Teacher - click "Seminars" tab, above) on investing, an assignment would be to write out a description of the table, explain 3 really important points you get from the table, etc.

The table shows 20 years of color-coded sector returns, ranked with the top performer at the top (with actual returns in each box) and the worst performer at the bottom.  So, for example, if you are interested in how Large Cap Growth stocks performed, just eyeball the purple box.  You'll note that Large Cap Growth was the top performer in 5 of the 20 years.  Notice, as well, that it was the worst performer among the 7 sectors shown for 3 of the 20 years.

The 3-year period 2000-2002 is instructive.  You'll notice that Large Cap Growth ended up at or near to the bottom.  This follows 2 years at the top.  This was a period where many investors got hammered as they piled into Large Cap Growth!

Diversified Portfolio

The real strength of the chart goes beyond the annual relative ranking of sectors.  It shows also a diversified portfolio - the white box.  The diversified portfolio - spelled out in the footnote - is basically 65% stocks and 35% fixed income (bonds).  Important point:  the diversified portfolio is never the top performer but also is only in the bottom three 2 times over the 20-year period!  This is an excellent visual depiction of how diversification reduces volatility!

Next, look at the "Fixed Income" box.  This is the bond market ( not CDs or cash or money markets - but the bond market as represented by the Barclay's Aggregate Index).  As you look at it, notice the "Large Cap Core" box.  This is essentially the S&P 500, the most widely used benchmark in the stock market.  You'll see that "Fixed Income" tends to do well when "Large Cap Core" does poorly. The most stark example is 2008, with "Large Cap Core" down -37% and "Fixed Income" up +5.2%!

Notice other years where "Large Cap Core" had  negative returns.  Eventually the light bulb will go off, and you'll see that "Fixed Income" has been an excellent hedge against drops in the stock market. Understanding the role of "Fixed Income" is very important in portfolio management. 

Another use is to approximate returns for different asset allocations.  For example, if you're wondering how an aggressive allocation of 90% "Sm Cap" and 10% "Fixed Income" did over the period, just calculate the annual returns and multiply.  For 1983, for example, the return was .9*18.9 + .1*9.8 =  17.99.  Multiply the annual returns (use 1.1799) and take the 1/20th root and you've got the average annualized return.

A final use of the chart is to start off with a sum of money, $500,000, say, and draw down 4% at the beginning of the year, using, for example, the diversified portfolio.  In this way, you can get a feel for how a retiree in the decumulation stage would have fared over this period.

The bottom line is that the chart can be used for many purposes, only limited by your imagination.  As a caveat, keep in mind that it is one 20-year period.  The next 20 years will be different.  Still, in some ways, it very likely will be similar.

The next post will look at the second page of the chart.