A diverse portfolio is playing it safe
No asset class is consistently a top performer
For the first time in decades, the top three asset classes are small-cap stocks. at least, they were in calendar 2010, according to the latest Why Diversify? chart from Franklin templeton investments.
every year, i tack the new version of this chart onto the wall of my workstation to remind me of the virtues of broad diversification as well as the impossibility of predicting when any particular investment class might succeed going forward.
a case in point is that wretched year, 2008, when Canadian small-caps lost 47% and global small-caps lost 31%. Such losses would be enough to scare off any investor, but as so often happens, those brave enough to step up to the plate and buy small-caps at that point would soon have been handsomely rewarded.
When the market roared back early the following year, Canadian small-caps topped the charts, ending with a 75% return for 2009, and repeated the feat in 2010, when they returned 38.5%. they were followed by 20% for american small caps (in 2010) and 19.6% for global small caps.
So does this mean you should now l oad up on small-caps in every country? that would be a dubious strategy and an invitation for getting “whipsawed.” that’s a term that describes the phenomenon so often experienced by investors who chase the current topperforming fund or asset class, only to buy high and later sell low when the trend reverses.
that’s not to say chasing last year’s winners won’ t work out for a year or two. emerging Markets or BriC funds (Brazil/russia/india/ China) topped the charts for five straight years: from 2003 to 2007. as it happens, latecomers to that party would still have done all right if they bought after year two, since the bull had three years to run.
But after five straight years, it should have been apparent the good times in emerging Markets could not last indefinitely: those who bought in 2007 would soon have regretted their decision because during the great market crash of 2008, BriC funds were the worst performing asset class, with a loss of almost 50% (49.1%) while broader emerging Markets were third worst at minus 41.4%.
Mind you, buy-and-hold investors who hung on or even bought more in 2008 would soon have been vindicated for their bravery and/or stubbornness. When markets rebounded early in 2009, emerging Markets and small-caps led the ascent. in 2009, the templeton chart shows, BriC and emerging Markets returned 54% and 52% respectively, lagging only Canadian small caps. returns were less robust in 2010 but still nicely in the plus ledger: emerging Markets returned 13% and BriCs 4%.
as i’ve pointed out before, the templeton chart is overly heavy in the two main asset classes favoured by mutual fund companies: stocks and bonds. Bonds were of course the investor’s saviour in 2008, with u.S., global and Canadian bonds 1-2-3 that year and the only asset class with positive returns. in 2010, global highyield bonds were the best fixed-income performer at 8.5%, followed by Canadian bonds at 6.7% and u.S. bonds at 1% (a victim of currency movements for Canadian investors).
So why diversify? Stick the chart, pictured with myself below, on your own workstation wall and you can be reminded of the answer every working day: “Because no single asset class has consistently been a top performer.”
if Franklin templeton sincerely believes that, they might broaden the chart to include such alternative asset classes as gold and precious metals, commodities and real estate. on the other hand, the Big Picture chart from Vancouver-based investments illustrated reveals that over the very long haul, stocks have been the best-performing asset class.
available at investmentsillustrated.com, it shows $1 invested in 1935 grew to only $33 in treasury bills by 2011, versus $124 for bonds, $386 for international stocks, $1,444 for Canadian stocks and $2,387 for u.S. stocks.