Seeing The Big Picture

We’ve all seen those 3-D posters where you’re supposed to “look through” the poster and try to modify how your brain is “seeing” the image in order to pick up the 3-D image ingrained in the pattern.  Anyone who has ever done this knows it can take some practice but once you “get it” you “see” the image and can even look around the picture and examine the detail. It’s pretty amazing.   For some people, picking up the 3-D image is very easy.  But other people never “get it” because it can be counter-intuitive to how they “see” things and they can’t help but look at the detail instead of the big picture.

In a similar fashion, I believe investors have their own version of the 3-D chart that shows the value of diversification of asset classes, which I’ve included below.  This chart is published annually (for free) by Callan Associates an institutional investment research firm and it can be viewed or downloaded at

As you scan the image, I’m sure your first impression is that this is a complicated-looking chart below which looks like a vision test chart used by some cruel eye doctor.  But instead of straining your eyes to read all the contents of the chart, I think folks should approach the chart like they do one of those 3-D pictures.  So take a step back and view the chart in its totality and look how the different colored blocks represent different asset class performances from year to year (1994 – 2013).

Each column represents a year and each column has 10 blocks below it. Each block represents an asset class (growth stocks, high yield bonds, emerging market stocks, etc.) and each asset class is ranked top-to-bottom for that year based on total return.

For example, in 1994 (the first column) we see the gray box, the MSCI EAFE stocks (developed markets outside the US like Europe, Australia and Far East) performed the best (+7.78%) while the MSCI Emerging Markets (orange block) performed the worst (-7.32%).  But take a look at 2003 through 2007, that same orange box for Emerging Markets performed the best.

You can certainly look at other asset classes’ performance over this 10 year span but the way to look at this is in its totality by examining the trends by the color of the boxes.  Some are the worst performers for several years and then, they’re the best.  Even inside a relatively short time period of ten years, these trends can be completely reversed!

Investment Returns by Asset Class 1994-2013


The point is that making the “call” on which asset class will perform the best in any particular year is very difficult and why I argue for diversification in client portfolios.  In addition, this also underscores the main source of under-performance of peoples’ real-world portfolios from selling low (bailing out) and buying high (jumping in).  I wrote in my blog “Want to Beat the Market? ( that of the few funds that out-perform (only about 18% of 1,540 funds in one study), 97% of those out-performing funds experience at least five years of under-performance in the 15 year period with 60% of the funds enduring seven or more years of under-performance.

So if you’re really smart (or lucky) and pick one of the 18% of funds that will eventually out-perform, you’ll also need the intestinal fortitude to stick with that fund over five or seven years of under-performance.  That’s a lot of cocktail parties and backyard BBQ’s where you’ll have to change the subject when your know-it-all brother-in-law brags about his investments.

Bottom line:  Trying to make a “call” on what asset class will outperform in a particular year is exceedingly difficult.  Sticking with it is even harder.  Instead, take a step back and “see” the Big Picture on the advantage to diversifying your investments.

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