A reminder to investors to establish their risk tolerances, avoid the temptation to pick winners, allocate to a range of asset types and focus on the longer term.
Witnessing the “red ink” generated by most asset classes in early 2022, it can be easy to forget how well investors have fared over longer periods.
Markets have certainly been challenged in recent years, most notably by the Covid-19 pandemic, but nonetheless, have demonstrated considerable resilience, aided by government fiscal stimulus and solid profits from the world’s largest technology companies. Low interest rates also played their part, although we have seen this tailwind run out of puff, causing bond markets to deliver uncustomary weak returns in 2021.
The volatile nature of financial markets is highlighted by Mercer’s “Periodic Table” of investment returns. Produced annually, the Table colour-codes 16 major asset classes and ranks how each performed, on an annual basis, over the last 10 years.
A glance at the Table, with its scattered palette, quickly highlights how problematic it is to unearth patterns; at least patterns that could be of use to us looking forward. Last year’s stars sometimes prove to be a winner again the next year, but at other times sink to occupy the lower ranks. If only investing were easy!
Looking across 2021 and the past decade, a number of observations can be made from the Periodic Table:
Diversified funds, including those offered via savings plans such as KiwiSaver, tend to have exposure to a collection of the asset classes contained in the Periodic Table. Looking at the past calendar year, such funds with a growth orientation, particularly focusing on offshore asset classes, generally performed better than others. Meanwhile, funds with a conservative and/or domestic orientation would have eked out returns that were more modest.
“When an investor focuses on short-term investments, he or she is observing the variability of the portfolio, not the returns – in short, being fooled by randomness.” - Nassim Nicholas Taleb.
The Periodic Table, and indeed the above quote, remind us that investment markets are inherently volatile. We can never predict with a high degree of confidence what the future will hold over the short to medium-term. Therefore, for most individuals, the power of investing is harnessed through securing asset class diversification, taking on the risk you can tolerate and adopting a longer-term perspective. While a rock band may be an unlikely source of investment inspiration, Guns N’ Roses essentially had it right – all we need is just a little patience.
This article does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.
Delivered to your inbox
In a world full of content, notifications, and breaking news, we want to help you cut through the noise and equip you with the latest investment thinking and ideas that will help shape your perspective and decisions.
Stay at the forefront of key global and local investment ideas as they evolve.