The 2020 Quilt Chart and What It Means for Investors

After a volatile year like 2020, there is often a manifestation of new market gurus, each claiming to have the crystal ball with which to generate huge positive returns in upcoming years. We know that statistically, a small portion of active traders will outperform within a year, but we also know that no one has been able to outperform market returns over long periods. 

All quilt charts, like the one below, have implications about predicting the future. This colorful table ranks each major asset class from best to worst return for each year. Can you determine if there any identifiable pattern? 

There are two major concepts to be taken from these charts: that investing in equities results in more volatility in exchange for higher long-term returns, and the key insight – no one can time the market. Evidence indicates the opposite: that attempting to predict the market leads to underperformance. Even more shocking is that the active traders that outperform in one year are statistically more likely to underperform in the coming years. 

To envision this more fully, we will follow a hypothetical investor who chases returns based on the previous 1-3 years of data. 

  • He starts investing in the year 2000 with a basic portfolio, then experiences the 2002 drop and decides to move to bonds. Bonds then become the worst-performing asset class in 2003, 2004, and 2005. 
  • In 2006, he decides that the market has corrected and jumps back into equities. This time, Real Estate and Emerging Markets have been the top-performing investments, so he goes all-in on those. Holding for the next two years, he loses again, with his investments as the bottom performers in 2007 and 2008, respectively. 
  • Upset and confused, he sells those positions, misses Emerging Markets’ explosive year in 2009, and decides to invest slowly and carefully, sitting on mostly cash over the upcoming years. 
  • Unfortunately, he watches from the sidelines for the next ten years, as one of the strongest bull markets in history unfolds.

Too often, emotions and the human proclivity to short-sightedness detract from the investment returns that are rewarded to the long-range investor. 

Recently, technology stocks have been a common topic of conversation. Individuals may look at 2019 and 2020 and wonder why they have not held solely Apple or Amazon stock. Or maybe a colleague shared about their few technology stocks skyrocketing in the past 2 years. It is worth asking again – is there a clear pattern in the quilt chart to indicate what will happen in the years to come? 

Sacrificing the diversification benefits to move to a single S&P 500 fund or something that tracks the NASDAQ is the very opposite of what years of investment data and analysis tell us. If anything, the data indicates that it may be time to make sure that your portfolio is not over-exposed to these benchmarks. 

The market events in 2021 thus far are a good reminder of the importance of staying disciplined in diversification and philosophy.  To avoid the fate of our hypothetical investor and succeed in the long term, it is critical to have maintained a diversified portfolio that is matched to your risk level and investment goals. As a client of Legacy, your portfolio has appropriate exposure to all the major asset classes and is built to provide the highest probability of reaching your financial goals. You can depend on us to guide you away from these common investment pitfalls and keep you focused on your long-term goals. 

Leave a Comment

Scroll to Top