Sometimes a picture really can make things easier to understand. Many of the important ideas and concepts you need to know as a long-term investor don’t require lengthy explanations. They can be as simple as these four charts. Together, these charts illustrate foundational principles of investing such a focusing on the long term, diversification, and not letting emotions compromise your portfolio.
Source: Morningstar Direct 2018. Cash (BofAML 3M U.S. Treasury Note TR U.S.D). Index representation as follows: U.S. Large Neutral (S&P 500 Index), U.S. Large Value (Russell 1000 Value TR Index), U.S. Small Neutral (Russell 2000 TR Index), REITs (Dow Jones U.S. Select REITs TR Index), International Large Value (MSCI World Ex U.S.A Value Index (net div.)), International Small Neutral (MSCI World Ex U.S.A Small Cap (net div.)), Emerging Markets Value (MSCI Emerging Markets Value Index (net div)), Global Short Bonds (Citi WGBI 1-5Yr Hdg U.S.D), U.S. Short Investment Grade Bonds (BofA ML Corp & Govt 1-3 Yr TR). 65/35 Index Mix: 2% Cash, 16% U.S. ST Bonds, 17% Global ST Bonds, 15% U.S. Large Neutral, 12% U.S. Value, 8% U.S. Small Neutral, 14% Int’l Large Value, 7% Int’l Small Neutral, 5% Emerging Markets Value, 4% REITs; rebalanced annually. Diversification does not guarantee profit or protect against loss in declining markets. Asset allocation does no assure or guarantee better performance and cannot eliminate the risk of investment losses. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Fixed income investments are subject to interest rate and credit risk. Emerging markets involve additional risks, including, but not limited to, currency fluctuation, political instability, foreign taxes, and different methods of accounting and financial reporting. Real estate securities funds are subject to changes in economic conditions, credit risk and interest rate fluctuations.
What This Chart Means to You: Investing is not unlike a healthy diet. You don’t eat the same thing every day for breakfast, lunch, and dinner (unless you’re a toddler), so make sure you have variety — in this case, a number of asset classes, such as International, REITs, Short-Term Bonds, etc. As you can see, even though an asset class is on the top one year (Emerging Markets Value in 2007) that same asset class may be at the bottom the next year (Emerging Markets Value in 2008). Rather than trying to predict the winners and losers, keep a balanced, globally diversified portfolio (like the one shown in white) to help you stay on track toward your goals. You won’t be the single best performer in any period, but you also have fewer reasons to worry about poor returns from a single asset class. And that can help your portfolio get you where you want to go.