The periodic table of investment returns and your portfolio

Whenever you hear about a winning stock or a soaring asset class, you may start to fear you are missing out on investment returns. Daily hype from the media or unsolicited advice from friends about ‘where to invest right now’ can make you question your investment choices, make bad decisions or leave you feeling like you should be taking on more risk.

The reality is that if you’re a successful business owner or leader, you probably do not have the time, inclination or energy to research and anticipate what the right mix of investments is for your personal portfolio. What you may actually be missing out on are the benefits of a well-built, disciplined financial plan and portfolio construction designed to accomplish your specific goals. Let’s take a look at investment returns, displayed in the style of the periodic table of the elements, to learn what they mean for your portfolio.

The periodic table of investment returns

One compelling visual we like to share with our clients to ease their FOMO is the periodic table of investment returns (figure 1), showing ranked returns for various assets classes by year over 20 years. This chart is a powerful visual demonstration of the unpredictability of investment returns across major asset classes, and indirectly illustrates the importance of diversification, discipline, re-balancing to a target allocation, and controlling risk.

figure 1. Periodic Table of Investment Returns 2002-2021.

As you examine this sea of color on the table, you might find what appear to be patterns. With a closer look, you can see that there is no predictability. One year’s hottest performing asset class is at or near the bottom the following year (or vice versa). Even that is not predictable either! Unfortunately, multiple investor behavior studies including work from Berkeley Haas Finance Professor Terrance Odean have shown that hopping around and chasing recent returns in hope of similar future returns can be hazardous to your wealth.

Recency bias

With investing, people often fall prey to recency bias where they expect recent strong returns of a certain investment or asset class (e.g. stocks, bonds, real estate) to persist consistently. In reality, events are random within their long-term patterns.

For example, stocks tend to outperform bonds in the long run, but on any given day or year, this performance can vary dramatically on that path, among the asset classes and all the way down to the individual security level. While investors get drawn into stocks or classes that are “on a tear,” the reality is that despite temporary strong performance, they tend to regress to the mean (return to their typical returns) over the long term.

While the periodic table of investment returns helps depict this phenomenon, you may want to consider this non-financial example: Imagine a region of the world that experiences fairly reliable levels of rainfall annually. While the average rainfall amount may stay consistent, the days on which rain occurs is random, and once in a while, the region experiences floods or droughts that could swing the measurement in one direction or the other.

Investment returns to serve your financial plan

When you ask, “How can I get the highest return in any given year?” without regard for downside, you fail to take into consideration your bigger picture. What aspirations do you have for you and your family? How well positioned are you to fund them? The more strategic question to ask when it comes to your investments is, “What realistic return do I need to support my specific financial goals, and what level of volatility can my long-term plan and I tolerate?”

Where your portfolio should fall on this chart — that is, the right level of diversification for you — is a question that we help our clients answer. Your mix will change based on your goals, risk tolerance, account balances, timeline and other factors. We help with the discipline of staying invested despite volatility and rebalancing your portfolio back to its target allocation as winners or losers emerge.

Benefit of diversification

What the periodic table of investment returns so elegantly summarizes is the benefit of diversification, a concept that won the Nobel Prize in Economics in 1990. When you hold a combination of asset classes, you always capture a portion of the highest returning asset classes and never have excessive exposure to the lowest-returning asset classes.

This diversification helps smooth out returns over time. You will be able to plan more effectively using a realistic return, rather than investing emotionally to try to make superior returns. With a diverse, well managed investment portfolio you can also navigate uncertain times more confidently.

A clear illustration of diversification in the periodic table is the sample 60% stocks, 40% bonds blend shown in the black squares. It is never at the bottom, nor at the high-risk top. Dampening volatility also has an additional benefit not shown in the chart:  for a given level of return, lower volatility increases one’s compounding rate.

While you may always want to be at the top when it comes to your business or career, the middle ground may be the best place for your investments. The next time investing doubt creeps in, remind yourself to ‘embrace, don’t chase.’ Embrace uncertainty with smart planning and avoid the temptation to chase something that is already gone.

If you want to figure out which types of assets (and how much) you should include from the periodic table of investment returns, we invite you to schedule a consultation. When you speak with one of our CFP® Professionals, they can guide you through what makes sense for your situation.