One of the most compelling illustrations of the benefits of diversification is known as the periodic table of investment returns, originally introduced by Callan Associates in 1999. It’s called the periodic table because it resembles the periodic table of elements with its different colored boxes. The periodic table of investments shows the annual performance of different asset classes over time, sorted by relative performance. If the same asset class outperformed every year, then the colors on the top would all be the same. But, they’re not, which illustrates the importance of making sure you have a number of different assets in a portfolio.
The periodic table of investment performance demonstrates a few things. First, there are certain investments that tend to be either the highest performing or lowest performing. A great example of this is emerging markets equities. Emerging markets had the highest relative performance for 7 of the 15 years in the chart and the lowest return for 2 of the years. In other words, emerging markets has historically been a volatile asset category, but also a relatively high returning asset.
The key to realizing the high return, though, is staying invested over time. For example, if an investor sold out of emerging markets after the 53.8% loss in 2008, she would have missed the 83.8% performance gain the following year and the 21.8% gain the year after that. In general, the more volatile asset classes are most likely to be at either the top or the bottom depending on how well the market performed that year.
By building a portfolio of a variety of asset classes, we ensure that our clients are always invested in the highest performing asset class next year, even if nobody knows which asset class that will be. We would like to remind you that some of your portfolio was invested in last year’s high performing investment in case you wonder whether you benefited in the recent gains in bonds, emerging markets, or whatever category is hot at the moment.