Asset Allocation: Why Bother?

February 29, 2024

I just received this chart from our friends at MFS®. I’ve seen these many times over the years I’ve been in the business, and I think this is an extremely informative visual.


What are we looking at here? This rather large random-looking quilt pattern is a map of various market sectors and how they performed year over year for the last 20 years. The last column on the right is each class’s average annual performance over the same time period.

There is so much information we can glean from this chart that I could write for days about it. I’ll do my best to sum up some key points today.

1. Each and every class on its own spent time either near or at the bottom of the chart. Everyone took their turn “in the barrel.”

2. There is great variability from year to year at the top of the chart. Only once did any year’s top performer repeat as the next year’s top performer.

3. It’s been difficult to beat big American stocks over the last 2 decades. Large-cap growth and large-cap value were the #1 and #3 market sectors for the last 20 years.

4. A diversified portfolio helped avoid the pitfalls of a stock-only portfolio. While all-stock portfolios had years that were at LEAST -36%, the worst year for a diversified portfolio was -27%.

5. Commodities were the ONLY sector that lost value over the whole 20-year term.

6. The real estate business did well over the last 20 years. REIT’s (Real Estate Investment Trusts) returned an average of 7.7% return.

7. Cash is the ONLY sector that had a positive return every single year for the entire 20-year term. Don’t let that mislead you though. It still had the second-worst performance for the whole term added up.

8. Large Cap Growth stocks had the best year of any asset class in ANY year in 2023, with a 43% return.

Does any of this teach us much? Or is this just a neat graphic for statistics nerds like myself?

There are lessons imbedded in here, for sure. Stocks have had great variability, meaning we have very little idea how much they are going to return year to year. Stocks have also averaged the greatest return. In essence, with risk may come potential return.

20 years of low interest rates have made it tough sledding for bonds and cash, but made an excellent environment for real estate.

A diversified portfolio does a great job of mitigating risk but does cost some return. If you need to play a little defense, be prepared to sacrifice some of your potential returns.

What will the next 20 years look like? The only guarantee I can give you is that it won’t look like the last 20.

As always, this and a full library of educational content can be found on our website, www.paducahfinancialconsultants.com.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification or any strategy does not protect against loss or assure success.

Asset allocation does not ensure a profit or protect against a loss.

The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.

Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

Stock investing includes risks, including fluctuating prices and loss of principal.