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Friday, February 28, 2014

My Favorite Investment Chart Updated

My favorite investment chart is the 2-pager put out annually by BlackRock:

Asset Class Returns A 20-Year Snapshot.

I take it with me to client calls and encourage clients to study it.  I take it with me to educational presentations.  I have written several past posts describing various nuggets investors, both newbie and seasoned, can uncover by looking at the chart.  IMHO, studying the chart and thinking about what it shows is just as good or better than reading some of the top investment books.

Here is what the first page looks like:

Source: BlackRock
CLICK GRAPHIC TO ENLARGE   The chart shows 20 years on returns on a yearly basis for seven asset classes including stock sectors, international stocks,bonds, and cash.  Each sector's annual return is shown as well as its relative ranking.

What I like about the chart is the white box.  It shows a diversified portfolio which is essentially 65% stocks and 35% fixed income and cash. The actual make-up of the diversified portfolio is shown as the last line in the footnote.  The footnote also includes disclaimers which should be read.

What does the chart show?  First off, notice that the diversified portfolio reduces volatility.  It is never in the top two slots for any given year but also is in the bottom three on only three occasions.  Secondly, notice that chasing "hot sectors" can be disastrous.  In 1998 and 1999, Large Cap Growth led the parade and subsequently fell to the bottom of the pack.  In terms of volatility, take a gander at how often the Small Cap sector return jumps above and below the diversified portfolio.  If you want volatility, this is one place to find it.  It is also where you will find one of the highest performing sectors.

Before you leave the chart, you'll want to notice the anemic return on Cash.  This 20-year period spanned in the chart was scary.  You had the East Asian Crisis, Russia Default sending Long-Term Capital Management into a death spiral, the bust, housing crisis, Europe struggling, a dysfunctional U.S. government, etc.  Many chose Cash as the place to hide.  It was costly!

Page 2 gives some numbers on the average annualized returns and charts the sectors:

Source: BlackRock
As shown, the Diversified Portfolio return 8.3%.  This is an average annualized return. Notice that its standard deviation (mathematical measure of volatility) is considerably lower that the sectors that outperformed.  The diversified portfolio investor surely slept better over the period than did those who concentrated their investments.

As you view the charts, recall that the biggest mistake that investors make is they pile in at high prices (when all the news is positive) and run for cover at the bottom (when news is horrible).  How many people do you know who gave up on investing in late 2008 when they should have had their buying hat on?

For those with a mathematical bent, returns on various allocations can be calculated from the information given. For example, some readers may want to go through and get a rough idea of how they would have fared if they started with, say, 80% stock/20% bonds and systematically reduced the stock allocation every 5 years or so.  If you need help doing that or a similar calculation, let me know.

Disclosure:  Past performance is not an indicator of future performance.  This post is intended to be educational.  Investors should do their own research or consult a professional before making investment decisions.

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