This Chart Can Help You Win Big With These 3 Vital Stock Market Lessons

When you first look at it, the Callan Periodic Table of Investment Returns looks very similar to the periodic table of elements that you may have memorized in high school.

© Provided by The Motley Fool This Chart Can Help You Win Big With These 3 Vital Stock Market Lessons

But this simple chart, started in 1999 by Jay Kloepfer, contains crucial investment information that can help make you a better investor. It ranks how various asset classes performed each year (from best to worst) and can also help teach you three vital lessons.

© Callan. Used by permission Chart of investment returns by year and asset class.

1. What goes up must come down, so make sure you rebalance

Investments that have been at the top of this performance chart in recent years can do a lot worse in subsequent years, and investments that have been out of favor can quickly rise and do very well. From 2003 to 2007, emerging markets consistently held one of the top two performance spots but that drastically changed in 2008. When the markets crashed, this asset class lost 53.33% of its value.

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If you had owned emerging markets stocks or funds at this time, this huge loss may have made you sell out of the investment. But if you had, you would’ve missed its rebound in 2009 when it earned 78.51%. U.S. fixed income was among one of the worst-performing asset classes from 2003 to 2007, but in 2008 it became a safe haven for investors wary of the stock market and emerged as the top-performing asset class.

This is why rebalancing your portfolio is so important. For example, if you had rebalanced your investments at the end of each year, you would’ve sold off a portion of your best performers (which would’ve included emerging markets) and purchased U.S. fixed income (one of the worst performers) in 2008. This would’ve potentially reduced your losses. Similarly, in 2009, you would’ve sold U.S. fixed income and repurchased emerging markets, positioning you for its recovery. 

2. The stock market has always come back, so stay invested

When you’re in the middle of a bear market and watching your account balances decline, it can feel like it will go on forever. With no end in sight, you might even throw in the towel and call it quits on investing. But if this chart teaches you anything, it’s that the stock market has always rebounded, and that time in the market is more important than timing the markets.

Over the last 20 years, the stock market took a hit from 2000 to 2002 and again in 2008. If you had invested only in large-cap stocks in the early 2000s, you would’ve seen your account balances decrease by 43.19% over this three-year period, and 37% in 2008 alone. In each of these time periods, if you had stayed invested, you would’ve regained all of your losses within four years. 

Losing money is scary, especially when your livelihood seems at stake. This fear can result in investors making emotional decisions that can cost them a lot of money. In 2008, if you had $100,000 invested into large-cap stocks and sold your investment, you would’ve realized a $37,000 loss. While the past is no guarantee of the future, seeing the trend of investments coming back from their losses can help keep you grounded and invested for the long term. 

3. You can’t predict which asset class will do well, so diversify

Unless you can see into the future, you don’t know which asset class will perform best each year. Stocks are riskier investments and you should get rewarded more on average for owning them, but that doesn’t mean that they’re always the best performers. From 2000 to 2002, large-cap stocks were one of the worst-performing asset classes. They were in the middle of the performance pack from 2005 through 2012, and among the top-performing asset classes from 2013 through 2017.

When you can’t predict with certainty what will happen or when, diversifying and owning a little bit of everything can help. Diversification will ensure that you always own some top performers as well as some of the average-performing asset classes. It will also guarantee that in the event of a market crash, you will own some safer investments, like bonds or cash equivalents, that could help you hedge your losses. 

History doesn’t exactly repeat itself, but you can gain knowledge from the past. When you apply what you’ve learned, you become a more informed investor. Using these three vital lessons from the Callan chart — rebalancing, staying invested, and diversification — you can set up your portfolio for future success. 

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