In our last post, “As Close to a Market Prediction as We’ll Ever Make,” we shared a visual depicting long-term market growth during the past 80+ years. Today, let’s zoom into a close-up view of various annual asset class returns. Formally entitled “The Randomness of Returns,” this image by Dimensional Fund Advisors has long been popularly referred to as “the crazy quilt chart.” It’s easy to see why. 1
1 In US dollars. US Large Cap is the S&P 500 Index, provided by Standard & Poor’s Index Services Group. US Large Cap Value is the Russell 1000 Value Index. US Small Cap is the Russell 2000 Index. US Small Cap Value is the Russell 2000 Value Index. Russell data copyright © Russell Investment Group 1997-2014, all rights reserved. US Real Estate is the Dow Jones US Select REIT Index, provided by Dow Jones Indexes. International Value data provided by Fama/French from Bloomberg and MSCI securities data. International Small Cap data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. International Small Cap Value data compiled by Dimensional from Bloomberg and StyleResearch securities data. Emerging Markets is the MSCI Emerging Markets Index (gross dividends), copyright MSCI 2014, all rights reserved; see MSCI disclosure page for additional information. One-Year US Fixed is the BofA Merrill Lynch One-Year US Treasury Note Index, used with permission; copyright 2014 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Five-Year US Government Fixed is the Barclays Capital Treasury Bond Index 1-5 Years, formerly Lehman Brothers, provided by Barclays Bank PLC. Five-Year Global Fixed is the Citigroup World Government Bond Index 1-5 Years (hedged), copyright 2014 by Citigroup. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
Each color represents a particular asset class. For example, dark blue is U.S. large company stocks. Gold represents several types of international stocks. The green squares are various kinds of high-quality fixed income. Each column in the chart stacks all these investment types from the best- to the worst-performing asset class for that particular year.
If you’d like, you can click on the image to enlarge it. But the main point is readily seen at a glance, with no need to overthink it. When we show it to investors, we ask: Based on what you’re seeing here, what do you think we can expect next year? The usual response – appropriately – is a chuckle. Clearly, it’s anybody’s guess.
In the world of fabric, crazy quilts make good use of material that is simply too irregular to fit into a repeatable motif. The blanket may be a work of beauty, but the parts defy any pattern. That’s a great way to think about our capital markets too. By spreading your investments across a broad range of asset classes, you can expect to sleep well-covered at night. Fixate (or chase) the parts instead of the whole, and you just may drive yourself crazy.
Sage Serendipity: Are you up for some creative quilting? If your work is bold enough, you just may end up with your own commemorative stamp, such as this stamp series, honoring ten quilts created around 1940 through 2001 by African-American women in Gee’s Bend, Alabama.