Investment returns are random

Last year I ran a little contest for fun. I asked all of my clients to email in a guess as to which asset class would be the best performing for 2015. Their guesses had to be in by the end of January. The good news is we have a winner! Dennis from Henderson was the only participant who guessed the correct asset class – Congrats Dennis!

I’m running the SAME contest this year for another $50 gift card to the restaurant of your choice. Simply shoot me an email with your guess from the asset classes listed below – simply click the link to enter! (clients and our 401k plan participants only please)

What’s Your Guess?

You may remember from last year I posted this chart which looks like a periodic table of elements. The table proves nothing more than investment returns are completely random over any given period of time.

Each asset class on the chart:

  • Big Companies – S&P 500
  • Big Value Companies – Russell 1000 Value
  • Big Growth Companies – Russell 1000 Growth
  • Mid Sized Companies – Russell Midcap
  • Small Companies – Russell 2000
  • Small Value Companies – Russell 2000 Value
  • Small Growth Companies – Russell 2000 Growth
  • Real Estate – Dow Jones REIT
  • Bonds – Barclays Aggregate Bond
  • All Global Stocks – MSCI ACWI
  • All Foreign Stocks – MSCI EAFE
  • All Emerging Markets Stocks – MSCI Emerging Markets
  • Commodities – S&P GSCI Commodity Index

Check out the investment returns of the worlds major markets below:

Investment returns are random each year.

Investment returns are random each year.

Most investment returns are positive

I put a yellow highlighted border separating the positive investment returns from the negative investment returns. You’ll notice that the majority of markets have positive returns the majority of the time. This makes perfect sense because investment returns are positive on average or no now would invest.

9 Of 13 Asset Classes Were Negative!

You’ll also notice that most investment returns for the various asset classes were negative last year (2015), led by another disastrous year for commodities (down more than 30% for the second consecutive year! Fortunately, none of our clients have a large exposure to commodities. I feel bad for investors who bet heavily on commodities!

The moral of the post is you cannot predict the future. Thinking you can pick the best performing asset class is nothing more than an exercise in futility! For this reason, we invest in ALL asset classes, putting greater weight on some investments and a lower weight on others. This way, we’re assured we’ll capture the future growth of every asset class regardless of which ones perform the best.

It’s hard to be a diversified investor sometimes. It always seems so obvious in hindsight, “why didn’t I put more in stocks?” or “why didn’t I buy more small growth companies?”. Hopefully, this little exercise will help explain why we diversify, and why it works over long periods of time!