Its all the same........Only the names have changed - The Hyperion Effect

I saw the chart below from JP Morgan which is a variation on a similar chart we use with our clients when discussing investment markets and returns. The reason that I like this variation is that in addition to the various asset class returns each year it also includes a ‘Balanced’ portfolio to show you the benefits of diversification. We will save the debate about what a balanced portfolio consist of and the actual weightings for another day so for the moment lets firstly look at the colors.

The first question is can you spot a pattern?……………..No?, that’s because their isn’t one!

Take for example 2006 and 2007. If you looked at the returns at the end of 2006, investing in property (REIT’s) probably seemed like a good idea given they had just returned 35.1% and only two years before had again been the best performer at 31.6%. That would, as it turns out, have been a bad decision as the very next year it was the worst performing asset class losing just over 15%.

The one thing that does stand out however, excluding the relatively strong performance of emerging markets over the period, is that the ‘Balanced’ portfolio was pretty consistently right in the middle.

And that is the exact point of having a globally diversified portfolio of stocks and Bonds. Whilst hindsight would tell us that investing into emerging markets would have produced the best overall return at 16.9% p.a. if I had told you to put all of your money into that asset class 10 years ago you would have called me crazy.

However by holding a basket of everything the returns of the portfolio have been less volatile and more consistent over the 10 years and probably more importantly it hasn’t required any guess work on where to invest and yet still achieved a return of 8%.

As the great man says, it is all the same and each year its only the names that have changed. Having a well diversified asset class based portfolio will reap you the reward in the long run, so let me ask you this, how is your money invested?

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