Asset Allocation Quilt – No Asset Works Well Every Year. But…

Asset Allocation Quilt 2021 for Indian markets. I came across this interesting depiction of asset class performance chart in a tweet (link).

Have a look at the below quilt and spend some time studying it.

Asset Allocation Quilt

The table (or quilt) above ranks 10 asset classes (or sub classes of individual assets) in order of their return performance – from the highest to lowest – for each calendar year from 2012 to 2021.

So what is that is worth noticing?

  • No one asset or asset sub-class is the best performing one every year.
  • There are no permanent consistent winner here.
  • It goes without saying, that the past performance is not an indicator of future returns
  • Almost each year, there are new combination of top- 3/4 performers.
  • Almost everything goes from top to bottom to vice versa across different years.

And what is worth remembering?

As this article (link) states, the absence of any pattern in the returns of asset classes from one year to the next reinforces the importance of asset allocation to build a portfolio against trying to consistently predict the next winning asset class. A diversified portfolio of stocks, bonds, and physical assets is key to steering through every market condition. Such a portfolio may not deliver the highest return in any given year but will perform competitively across market cycles.

That said, you can try your hands at picking the best investment/asset for the next 1 year (or short term), but to be honest, if you are investing for the long term, then there are no inherent advantages to looking at short-term returns of individual asset classes. Instead, keep your focus razor-sharp and on your financial goals. For different types of goals like long-term, medium-term and short-term, think carefully (or take investment advise) and build a sufficiently diversified portfolio aligned to them with the right asset allocation. And once you have done that, then just do periodic rebalancing to make sure that the allocation remains relevant. A long-term goal, after a few years will become a short-term goal. So you need to rebalance and change allocation accordingly.

And if you are curious as to why call it a quilt, then I think that it is because as each colour represents an asset or asset sub category, the randomness of 1-year returns gives it a sort of a colored ‘quilt’ effect.

Sidenote – Bitcoin is a controversial topic in India (as of now in Dec-2021 with regulatory clarity still missing). But it has beaten all asset classes hands down. But that doesn’t mean that it is a way to make easy money. Its highly volatile and risky. And in my view, it is yet to establish itself as a proper asset class that is mass-accepted. So maybe, the quilt will include it in years to come.

Note – Overall, equity delivers best risk-adjusted, long-term, inflation-beating returns. It can be volatile. But the average returns are high enough to compensate for the fluctuations. So if investing for long term goals, make sure to allocate a large enough part to equity. Do read this and this and this and this.

To get yourself a well-thought-through detailed goal-oriented financial plan, that plans for all important life goals like children’s education, your retirement, house purchase, traveling, etc. via proper asset allocation, you can consider taking professional Stable Financial Planning Service. If you are interested, then head to this page for more details about the Financial Planning Service. You will increase the probability of achieving your goals on time without stress.

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