ARTICLES
Periodic Table of Investment Returns
By Vasco Laranjo, CFA
The periodic table of the elements is a fundamental concept in chemistry. Just as the chemical elements form the basis for many applications in chemistry, so do asset classes in finance. Understanding the different asset classes that exist in the financial world is key to build a solid, diversified portfolio. In this article I will introduce the concept of the Periodic Table of Investment Returns and its importance for the analysis of diversification.
Asset Classes
An asset class is a group of assets that share similar characteristics and are exposed to identical fundamental factors of the economy. The main asset classes are:
- Equities
- Fixed Income
- Commodities
- Real Estate
- Cash
Within each of these asset classes, there may then be further subdivisions in terms of inherent characteristics, geographical areas and so on. For example, in the case of equities, it is possible to categorize stocks by their market capitalization ranges, while in the case of fixed-income securities, a distinction can be made according to the classification of the issuers (government bonds, corporate bonds, etc.).
The Periodic Table of Investment Returns
The Periodic Table of Investment Returns, also known as the Callan Periodic Table of Investment Returns, was created by Joe Kloepfer of Callan Associates in 1999. 1 The traditional table shows annual returns for 9 asset classes, ranked from best to worst performance for each calendar year.
One of the most important uses of the Periodic Table of Investment Returns is to correct for representativeness bias when considering returns. Representativeness bias occurs when agents classify new information based on past experiences and classifications. This leads to a tendency to place undue importance on new information, which leads to an overreaction to newer data and, ultimately, to chasing returns and following momentum strategies.
In the chart below, I show the Periodic Table of Investment Returns using US-listed ETF total returns. Normally, indexes are used, but since I did not have access to data on some indexes, I had to resort to ETF data. Accordingly, the oldest or largest ETF that best represents each category was used. The list of the ETFs representing each of the displayed categories is presented in the next section.
Periodic Table of the Investment Returns
2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1 | US Fixed Income Aggregate: 7.90 | Emerging Markets: 68.95 | Real Estate: 28.39 | US TIPS: 13.30 | Emerging Markets: 19.05 | US Small Caps: 38.70 | Real Estate: 30.40 | Real Estate: 2.43 | US Small Caps: 21.59 | Emerging Markets: 37.26 | US T-Bill: 1.74 | US Large Caps: 31.25 | US Small Caps: 20.03 | Commodities: 41.36 | Commodities: 19.34 | US Large Caps: 19.78 |
2 | International Treasury Bond: 4.19 | Real Estate: 30.14 | US Small Caps: 26.92 | Real Estate: 8.64 | World Developed: 18.56 | US Large Caps: 32.31 | US Large Caps: 13.57 | US Large Caps: 1.28 | Commodities: 18.56 | World Developed: 26.42 | US Fixed Income Aggregate: 0.34 | Real Estate: 28.91 | US Large Caps: 18.40 | Real Estate: 40.54 | US T-Bill: 1.40 | World Developed: 14.00 |
3 | US T-Bill: 1.59 | US High Yield: 28.52 | Emerging Markets: 16.52 | US Fixed Income Aggregate: 7.70 | Real Estate: 17.63 | World Developed: 21.81 | Emerging Market Sovereign Bond: 6.04 | Emerging Market Sovereign Bond: 1.03 | US High Yield: 13.41 | US Large Caps: 21.75 | US TIPS: -1.43 | US Small Caps: 25.39 | Emerging Markets: 17.02 | US Large Caps: 28.76 | US High Yield: -10.98 | US Small Caps: 12.95 |
4 | US TIPS: 0.05 | US Small Caps: 28.49 | US Large Caps: 15.10 | Emerging Market Sovereign Bond: 7.65 | US Small Caps: 16.70 | US High Yield: 5.75 | US Fixed Income Aggregate: 6.00 | US Fixed Income Aggregate: 0.48 | US Large Caps: 11.54 | US Small Caps: 14.58 | International Treasury Bond: -1.75 | World Developed: 22.62 | US TIPS: 10.84 | US Small Caps: 14.54 | US TIPS: -12.26 | Emerging Markets: 9.80 |
5 | Emerging Market Sovereign Bond: -2.13 | World Developed: 27.51 | Diversified: 12.18 | US High Yield: 6.75 | Emerging Market Sovereign Bond: 16.52 | Diversified: 5.64 | US Small Caps: 5.04 | US T-Bill: -0.13 | Emerging Markets: 10.87 | Diversified: 11.94 | US High Yield: -2.02 | Emerging Markets: 18.22 | World Developed: 9.71 | World Developed: 11.66 | Diversified: -12.89 | Diversified: 7.06 |
6 | US High Yield: -17.55 | US Large Caps: 26.61 | US High Yield: 11.91 | International Treasury Bond: 3.96 | US Large Caps: 16.06 | Real Estate: 2.30 | US TIPS: 3.59 | World Developed: -0.37 | Emerging Market Sovereign Bond: 9.27 | Emerging Market Sovereign Bond: 10.28 | US Large Caps: -4.49 | Diversified: 16.02 | International Treasury Bond: 9.50 | Diversified: 10.83 | US Fixed Income Aggregate: -13.02 | Real Estate: 6.90 |
7 | Diversified: -19.61 | Diversified: 21.62 | Commodities: 11.90 | US Large Caps: 1.88 | Diversified: 11.24 | US T-Bill: -0.09 | Diversified: 2.16 | US TIPS: -1.75 | Diversified: 8.69 | International Treasury Bond: 9.94 | Emerging Market Sovereign Bond: -5.47 | Emerging Market Sovereign Bond: 15.48 | Diversified: 7.57 | US TIPS: 5.68 | World Developed: -15.34 | US High Yield: 5.83 |
8 | Commodities: -31.80 | Commodities: 16.19 | Emerging Market Sovereign Bond: 10.84 | Diversified: 0.98 | US High Yield: 11.06 | US Fixed Income Aggregate: -1.98 | US High Yield: 1.89 | US Small Caps: -4.48 | Real Estate: 8.57 | US High Yield: 6.07 | Diversified: -5.99 | US High Yield: 14.09 | US Fixed Income Aggregate: 7.48 | US High Yield: 3.76 | US Large Caps: -18.16 | Emerging Market Sovereign Bond: 5.66 |
9 | US Small Caps: -34.14 | Emerging Market Sovereign Bond: 15.37 | World Developed: 8.35 | US T-Bill: -0.04 | US TIPS: 6.40 | International Treasury Bond: -3.58 | US T-Bill: -0.07 | Diversified: -4.75 | US TIPS: 4.68 | Real Estate: 4.90 | Real Estate: -6.03 | Commodities: 11.84 | Emerging Market Sovereign Bond: 5.42 | US T-Bill: -0.10 | Emerging Market Sovereign Bond: -18.63 | International Treasury Bond: 2.94 |
10 | Real Estate: -36.98 | US TIPS: 8.93 | US Fixed Income Aggregate: 6.36 | Commodities: -2.58 | International Treasury Bond: 5.66 | Emerging Markets: -3.65 | International Treasury Bond: -2.52 | US High Yield: -5.02 | World Developed: 2.63 | Commodities: 4.86 | US Small Caps: -11.12 | US Fixed Income Aggregate: 8.46 | US High Yield: 4.47 | US Fixed Income Aggregate: -1.77 | International Treasury Bond: -19.72 | US T-Bill: 2.57 |
11 | US Large Caps: -37.01 | International Treasury Bond: 5.43 | US TIPS: 6.13 | US Small Caps: -4.43 | US Fixed Income Aggregate: 3.75 | Commodities: -7.63 | Emerging Markets: -3.90 | International Treasury Bond: -6.69 | US Fixed Income Aggregate: 2.41 | US Fixed Income Aggregate: 3.55 | Commodities: -11.63 | US TIPS: 8.35 | US T-Bill: 0.40 | Emerging Market Sovereign Bond: -2.23 | US Small Caps: -20.48 | US Fixed Income Aggregate: 2.42 |
12 | World Developed: -40.62 | US Fixed Income Aggregate: 2.97 | International Treasury Bond: 3.83 | World Developed: -12.31 | Commodities: 3.50 | Emerging Market Sovereign Bond: -7.79 | World Developed: -5.97 | Emerging Markets: -16.17 | International Treasury Bond: 0.64 | US TIPS: 2.92 | World Developed: -14.75 | International Treasury Bond: 5.58 | Real Estate: -4.61 | Emerging Markets: -3.63 | Emerging Markets: -20.56 | US TIPS: 2.31 |
13 | Emerging Markets: -48.88 | US T-Bill: 0.27 | US T-Bill: -0.04 | Emerging Markets: -18.79 | US T-Bill: -0.04 | US TIPS: -8.49 | Commodities: -28.10 | Commodities: -27.59 | US T-Bill: 0.11 | US T-Bill: 0.69 | Emerging Markets: -15.31 | US T-Bill: 2.03 | Commodities: -7.84 | International Treasury Bond: -8.60 | Real Estate: -26.25 | Commodities: -0.49 |
Source: Yahoo Finance. Period: 1/1/2008 – 7/25/2023. Past performance is not a reliable indicator of future performance.
From the table, it can be seen that the returns of each asset class vary significantly over the years. This proves that it is extremely difficult to predict the asset classes with the best performance over time. As we can see, Commodities asset class was the top performer in consecutive years during 2021 and 2022, but performed particularly poorly both in 2020 and in 2023 so far ranking last in both years. US Large Caps which is having an incredible performance in 2023, has only reached the top spot once in the last 15 years, proving once again the variability of the returns.
Another goal of the Period Table of Investment Returns is to show the importance of diversification. For this purpose, a “Diversified” category is presented, based on an equally weighted portfolio that includes all the other 12 categories. As can be seen, the diversified portfolio is always in the middle of each column of the table, illustrating the benefits of diversification. The worst return for the diversified portfolio was -19.61% and the best was 21.62%. This strongly contrasts with the lowest total return of -48.88% and the highest of 68.95% incurred by Emerging Markets in 2008 and 2009, respectively. It is also interesting to note that the worst and best returns for both the Diversified portfolio and Emerging Markets were registered in the same year (2008 and 2009, respectively).
Asset Class Mapping Table
The table below shows the mapping of the asset classes and corresponding ETF:
Source: ssga.com, ishares.com, vanguard.com, invesco.com, as of July 25, 2023. Asset class mapping by vasconomics.com.
Sources
1 Source: Callan LLC, as of July 25, 2023
Data Source:
Code Source: GitHub Page
Cover Image Credits: © László Németh, CC0, via Wikimedia Commons
Disclosure:
The information provided on Vasconomics.com is for general informational purposes only and should not be construed as financial advice. The content on this blog is based on the author’s personal opinions and research, and it may not be applicable to your individual financial situation. It is always recommended to consult with a qualified financial professional or advisor before making any financial decisions. The author and Vasconomics.com disclaim any liability for any losses or damages incurred as a result of the information provided on this blog.