Chart of the Week: Periodic chart for asset returns
Hat tip to NGPF Fellow Charles Kafoglis for sending a note to me highlighting this set of charts from Callan Associates. Think of the chart below as the periodic table for stock market returns for various asset classes (think stocks and bonds, U.S. based and international). Each column represents one year and each box represents a specific asset class which has a specific color assigned to it. The percentages reflect the returns for that specific asset class. There's a lot to unpack here but just as we take the time in Chemistry class to learn the periodic table, we ought to spend the time to analyze the chart below to learn more about investing.
Here's one way to organize the assets in the chart with definitions at the end of this post (cap is short for market capitalization or the price of a given stock multiplied by the number of shares that a company has issued; fixed is short for fixed income a.k.a. BONDS):
So, why do I like this chart? I think it works well in showing how much the best and worst assets to invest in change on a year-in, year-out basis. The best asset one year may be the worst in the next year. Why does this matter? Well it suggests that you may not want to make bets on specific asset classes but rather to own all of them in a diversified, low-cost index funds since it appears there is not much persistence in returns (best performers don't often repeat in future years). With the exception of hedge funds, the assets listed above can be invested in via low-cost index funds.
Note: Each of the boxes above represents a different way to invest, including stocks and bonds, U.S. based and international. Each type of asset has a different color. Each column is a different year.
Step 1: Print out a version of this chart and have students draw lines connecting the asset classes year-to-year. As an example, connect large cap stocks year-to-year to show how its performance varies relative to the other asset classes in the chart.
Connect these assets first as your students may be most familiar with them:
- Large cap stocks (S&P 500 index)
- Small cap (or small company) stocks (Russell 2000 index)
- Cash equivalents (similar to a 3 month CD)
- Hedge Funds (use variety of investment strategies while attempting to beat the market)
- What was the best performing asset class in 2018? What was its percentage return?
- What was the worst performing asset class in 2018? What was its percentage return?
- Since 2009, which asset class was the BEST performer for the most years? How many years was it the best?
- Since 2009 which asset class was the WORST performer for the most years? How many years was it the worst?
- Many people believe that Cash Equivalents (similar to a savings account) is a safe way to invest. How do Cash Equivalents perform compared to other investments listed here?
- Which investment type in the chart do you think is the riskiest? Provide data to support your argument.
- Looking at the overall 20 year period in the chart above, do you think it is easy to predict which type of asset will be the best performer in a given year? Does great performance in one year tend to carry over in a future year?
- How has Cash Equivalents performed compared to Large Cap U.S. stocks (S&P 500) over the past 20 years? Calculate how many of the years that cash did better than large cap stocks.
- Hedge funds charge high fees and justify it by shooting for performance that will "beat the market." How have hedge funds performed vs. large cap stocks (S&P 500 index) over the past 20 years? How many years did it do better the large cap stocks and how many years did it do worse?
Let me know what you think and other ways that you might use this with your students.
- Real estate funds
- Cash equivalents: equals returns of the 3 month Treasury bill
- U.S. Fixed - Bonds with term over one year issued by U.S. government, mortgages and corporations
- High Yield - riskier U.S. bonds issued by companies that are riskier from a credit perspective
- Non-U.S. fixed - Bonds issued outside the U.S.
- Hedge funds - private investment funds that use variety of strategies to try and "beat the market"
- Large cap - large U.S. companies (e.g. S&P 500 index)
- Small cap - smaller U.S. companies (e.g. Russell 2000 index)
- Non-U.S. equity - invests in stocks outside the U.S. including Europe and Pacific region
- Emerging markets - invests in less developed countries such as Brazil, Russia, India and China
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.
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