Investment Strategy

Periodic Table of Investment Returns

illustrates benefits of diversification

By Rick Rodgers

Guest Columnist

Diversification is an investment strategy of spreading assets in a portfolio across several different asset classes. It is key to managing risk and helping your money grow over time. The Periodic Table of Investment Returns (above) illustrates the benefits of diversification.

The table shows the performance rankings of several asset classes for each of the last 10 calendar years. Each asset class is represented by a unique colored box that contains the asset class name and the total annual return for the correlating year. The best performing asset class for each year is ranked on the top row, while the worst performing is listed on the bottom row. In a perfect world, investors would somehow know in advance which asset class will perform the best and allocate to those assets, capturing the largest returns each year. However, in our imperfect world of investing, we are unable to know or consistently predict this information.

Choose an asset class listed in the first column (calendar year 2007) and follow its return for each of the next nine calendar years. For example, International Stocks was the second-best performing asset class in 2007, with a total annual return of 11.17 percent, a nice return. However, the following year, which was difficult for nearly all asset classes, International Stocks was the worst performing asset class, losing over 40 percent of its value. As you follow the performance of International Stocks through the remaining calendar years you’ll notice that it moves all over the table. This example illustrates how difficult it is to predict investment performance of a single asset class from year to year.

Credit: William Potter/iStock

Assets aren't all the same. Put several in your basket to 

maintain a diversified portfolio.

One of the most common mistakes of individual investors is attempting to choose an investment, or investments, this year based upon performance last year or in the past few years. This approach is referred to as “rearview mirror investing” or “chasing past performance.” The investor’s objective is a misguided attempt to increase returns by investing only in what appears to be hot at the time. The problem with this approach is the evaluation of the investment comes after it has already performed well, and the investor believes that the hot streak will somehow continue. While some asset classes may be the best or worst for two or more consecutive years, it is impossible to predict when the streak will begin and how long it will last. 

Markets are cyclical and impossible to accurately predict from year to year. Therefore, a more prudent approach would be to maintain a diversified portfolio, which is illustrated in the black boxes in the Periodic Table of Investment Returns. The Diversified Portfolio is never ranked at the top or the bottom of the table. It will never be the best or worst performing, whereas a single asset class may be the best or worst performing investment for a single year or multiple years.

Another benefit of diversification is the ability to manage risk in the portfolio. The two columns on the far right of the table rank the annualized performance (average annual performance for each of the 10 years shown) and risk. You will notice the performance ranking of the Diversified Portfolio is near the middle of the group, while the risk is ranked much lower. The message of the Periodic Table is that diversification can help manage risk and create more consistent returns over the long term. 

The views expressed herein do not constitute research, investment advice or trade recommendations.

Rick Rodgers

About the Author:

Rick Rodgers is a principal and director at Innovest Portfolio Solutions.  He is a member of Innovest’s Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to maximize efficiencies for our retirement plan clients.