A reminder to investors to establish their risk tolerances, avoid the temptation to pick winners, allocate to a range of asset types and focus on the longer term.
Witnessing the “red ink” generated by most asset classes in early 2022, it can be easy to forget how well investors have fared over longer periods.
Markets have certainly been challenged in recent years, most notably by the Covid-19 pandemic, but nonetheless have demonstrated considerable resilience, aided by government fiscal stimulus and solid profits from the world’s largest technology companies. Low interest rates also played their part, although we have seen this tailwind run out of puff, causing bond markets to deliver uncustomary weak returns in 2021.
The volatile nature of financial markets is highlighted by Mercer’s “Periodic Table” of investment returns. Produced annually, the Table colour-codes 17 major asset classes and ranks how each performed, on an annual basis, over the last 10 years. An interactive version of the Table is can be downloaded, as well as a standard printable version.
A glance at the Table, with its scattered palette, quickly highlights how problematic it is to unearth patterns; or at least patterns that could be of use to us going forward. Last year’s stars sometimes prove to be a winner again the next year, but at other times sink to occupy the lower ranks. If only investing were easy!
Looking across 2021 and the past decade, a number of observations can be made from the Periodic Table:
The short term may be random, but in the long term diversification matters. Looking at the past calendar year, funds with a growth orientation, particularly focusing on offshore asset classes, generally performed better than others. Meanwhile, funds with a conservative and/or domestic orientation would have eked out more modest returns. However, the Periodic Table also reminds us that investment markets are inherently volatile and that we can never predict with a high degree of confidence what the future will hold over the short to medium-term. Therefore, for most individuals, the power of investing is harnessed through securing asset class diversification, taking on the risk you can tolerate and adopting a longer-term perspective. As Nobel prize winning finance professor Harry Markowitz once said “diversification is the only free lunch in investing”.
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