Pictured above is the Callan Periodic Table. The larger PDF is here.
Each year across the top represents a column of the 10 major indices for investors. The top index preformed the best and the bottom index performed the poorest in each year. Each index has it’s own color, so it is easy to see how the different indices perform year to year. This truly is a fascinating graphic.
Some indexes perform great for a few years and then “revert to the mean” and perform poorly the next year or two. Look at the orange index, the MSCI Emerging Markets index. Some years it’s on the top with huge gains, like from 2003 to 2007. Then 2008 has it dead last, followed by 2009 being the top performer again.
What does this chart really show? It shows a few things.
1) It shows that your investments need to be diversified. If you are too centric on one area of investments (only in the S&P500, or only in Emerging Markets), your investments will swing wildly and you’ll miss out on a lot of gains. With diversification, when parts of your portfolio are down, your total returns can be boosted by other parts of your portfolio that are up. When some parts zig, others zag. That’s the beauty of diversification.
2) It shows that markets really fluctuate. When things are down, don’t panic. When things are up, don’t get too confident. When people think they know which direction the market is headed, show them this graphic and ask them to predict the next five years, accurately. They’ll balk. Like most everyone else, my crystal ball on future market direction is hazy, so I don’t invest in a way that requires me to know what’s coming next. Neither should you. Broadly diversified index funds will keep you from having to know what the future holds while also boosting your returns during fluctuations.
3) It shows that investing based on past performance, or “hot stocks” on their way up, is a terrible way to invest. Sadly, many people do this, and are then befuddled when they lose money in the market. Yesterday’s rock star index will be tomorrow’s loser. It’s counter intuitive, but it’s often best to buy funds that are declining, not rising, because so many revert to the mean in a few months or years. People can’t resist buying stocks and funds that are going up, but this isn’t a winning strategy.
This is why I feel bad for people who rely on their “money guy” to send them newsletters with the “hot stock tip” of the month, or the “10 best performing funds of 2018”. It’s all meaningless.
Stay diversified, buy in every month rain or shine, and remember that markets fluctuate.