“If 2017 was the year that everything worked then 2018 was the year that nothing worked.”
Ben Carlson CFA, A Wealth Of Common Sense blog, January 8, 2019
Asset allocation “quilt” charts, like the one here put together by investment blogger Ben Carlson, can help us make sense of the markets.
This chart shows how different types of investments performed last year and over a 10-year period.
Here’s some main takeaways about investment performance in 2018:
- For the first time in 10 years, cash deposits earned more than any other investment.
- Almost everything else lost money. (The second best performing asset class – the bond index – eked out a 0.1% return. Let’s just round down and call that a zero percent return).
- International stocks pulled down results even further. Developed market stocks (like Europe) lost almost 14%. Emerging markets stocks lost 15%. The average asset loss was 9.3%.
- Diversification protects you by evening out some of the highs and lows. Unfortunately, since assets did so poorly across the board, diversification would not have given you much protection in 2018. A diversified portfolio, containing a equally-weighted mix of assets, would have lost 7.2% in 2018.
- Still, Carlson points out the benefits of diversifying. “The asset allocation portfolio is never too hot or too cold. It’s never going to be at the top of the heap but it’s also never going to be at the bottom of the pile either,” says Carlson. How does that help? It encourages nervous investors to stay invested and tames those roller-coaster returns that can do so much damage to retiree portfolios. “Diversification,” argues Carlson, “remains one of the best ways to manage risk over the long-term, the only time horizon that matters to investors.”