|Source: Capital Pixel
updated "BlackRock Asset Class Returns"
two-page chart is out. This is my favorite investment chart. It shows 20 years of investment returns for 7 different, color-coded, asset classes including fixed income, international stocks, cash, and various stock sectors. Most importantly, it shows a diversified portfolio comprised essentially of 65% stock and 36% fixed income and cash. The actual composition is given in the very last footnote of page 1.
It cuts through all the nonsense and shows vividly that diversification reduces volatility. It also shows that chasing the hottest sector can be damaging. Consider, for example, 1998 and 1999 where Large Cap Growth was at the top of the column. If you would have run into someone claiming that they were hitting the ball in the upper deck with their Large Cap Growth Fund, you would probably have been sorely disappointed in 2000, 2001, 2002 as this sector was near, or at, the very bottom.
Page 2 shows line graphs of each sector over the 20 years. As you look at this roller coaster experience, recall 9/11, the dot.com bust, and last (but not least) the 2008 housing crisis. While you are at it, you can recall the ongoing geopolitical problems as well as the periods where it looked like even the U.S. government was on the verge of breaking down. As you recall all the reasons for grabbing your wallet and seeking a fast exit, grab your smart phone, your laptop, and even your iPad. You didn't have these 20 years ago. For that matter, you couldn't get a genome sequencing.
The bottom line is that the constant preaching of stalwarts like Warren Buffett, John Bogle, and Burton Malkiel to ignore the noise and get an asset allocation paid off. As shown on page 2, the diversified portfolio turned $100,000 into $531,326. The average investor over this period did considerably worse - especially those trying to pick stocks and/or time the market. This includes the parade of pontificators on CNBC, mutual fund managers and even the largest college endowments in the country.
I like to track the BlackRock diversified portfolio and
estimated the 2014 return
on New Year's Day at 7.96%. As shown on the chart, it was 8.1%--so I was off by only.14%.