The Chart Every Investor Should Understand

Transcript

2025 is over, and some asset classes had strong years and others maybe not as strong. And the same question pops up in January: what should I have invested in? That question assumes the goal was to pick the winner. What I want to do is zoom out a bit, because that question only tells us something in hindsight. The year already happened. The returns are already known. What's more helpful, especially when you're managing money over decades, is understanding how your portfolio behaved in any given year, and whether it's still structured in a way that supports where you're trying to go. In other words, did my portfolio do what it was supposed to do, and is it still aligned with where I'm headed?

So let's walk through what happened in 2025, how this tends to play out historically, and how we frame this conversation with clients. This visual is one of my favorites, and it's called an asset allocation quilt. You may have guessed why, because it kind of looks like a quilt, or some would argue a periodic table. Don't get too overwhelmed by the colors, the text, the numbers, and the percentages. We're going to go through it.

What this chart is really showing is that each column represents a year. We have 2025, last year, all the way back to 2011. Going down each column are individual boxes that represent an asset class, and each colored box is a different asset class. When I say asset class, I mean different parts of the global market. We're classifying the asset, or the company, because not all companies are the same. We can't bundle every company into one category. Depending on economic conditions or interest rate movements, certain asset classes behave differently, so it's important to categorize them. For example, US large cap is just United States large companies, Netflix, Facebook, Amazon. US mid cap would be mid-size companies. Then international developed, commodities, small companies, real estate, and fixed income, or what may be referred to as bonds. We even have cash in here. These asset classes make up the market, not the entire market, but the majority of the market for most investors. Each box shows how that asset class performed in that year, ranked from best return to lowest return.

One thing you might notice is how often the order changes. Last year's winner becomes the next year's loser, 2021 to 2022, 2022 to 2023. Sometimes last year's winner becomes next year's winner, 2023 to 2024. Sometimes cash is the winner, like 2018. Let's look at 2020. That was when COVID hit, and it was a big check-mark year. The market dipped way down in March and turned back up in the back half, and rates were also cut. In 2020, real estate had a tough year. But in 2021, if you remember, when people were refinancing and mortgages were at record-low rates, real estate was on fire. Over longer periods, that rotation continues. Markets respond to changing conditions. We just looked at one, COVID in 2020. In 2022, when inflation fear started to take headlines, not only did we have equities down, we also had fixed income take a beating, which is again that interest rate relationship. So when things change, an asset class might perform differently and rotate.

Now, some investors try to anticipate this. They try to guess what next year's winner will be and position heavily in whatever they believe will lead next. Sometimes that works in a given year, but over time, doing that consistently becomes very difficult. So going back to our question, what should I have invested in in 2025? Maybe a good answer is to own a mix of all of these asset classes, to have all of this in your portfolio. This is the idea of a diversified portfolio. We're not taking a single bet on one asset class. We're going to own all of them, or a mixture of all of them, and really smooth out the experience. By taking that approach, your expectations change a little. You know you're not going to be at the top, and you also know you're not going to be at the bottom. That's what this white box represents. A diversified portfolio is just a combination of all these different asset classes at a certain mix. This white box shows a 70/30 mix. Don't get too caught up on what that really means. It's just 70% in growth mode and 30% in the more stable gray and green boxes. The purpose of this structure isn't excitement, it's purely reliability. When you look at the color of the boxes, you'll notice the white box tends to hang in the middle. Over this 15-year period, large cap is leading the way, then mid cap, small cap, and here's our diversified portfolio. What this is telling us is that the 70/30 portfolio mix is averaging 9.68% a year over a 15-year period. Let's stick this in our back pocket. It makes sense, because we're owning all of these, so we're probably going to be somewhere near the middle.

When we're managing clients' portfolios, we're not a firm that's going to pitch or offer outperformance. We focus much more on what we can control, and let the investments support the plan. When we talk about alignment, we're not talking about beating benchmarks or trying to get the highest return in a given year. We're talking about whether the portfolio supports the financial plan. What does that even mean? Let me show you. We just looked at the asset quilt. Now we're looking at an actual portfolio and how it's behaving year after year. This shows investable assets over time. Here's our starting balance in 2026. Their ages are 61 and 61, with a $1.1 million total portfolio, no plan distribution, just RMDs, so don't worry about that. We're going to need to take out $96,000 from the portfolio in 2026. Here's the assumed return we're baking into the plan, around 6.5%, and they're in that 70/30 diversified portfolio mix.

So for this couple, here's our beginning balance, here's what we need to take out of the portfolio, here's our assumed 6.5% return, which is way more helpful to see in dollar format, and here's our ending balance. When we're managing the portfolio in real life, now we have a benchmark to aim toward. As you saw in the asset quilt, that 15-year average was about 9%. But we don't want to include 9% in the plan. We want to be conservative. We call it a lifeboat drill. You're going to have much more confidence and conviction making decisions when we're being more conservative in the plan. So we'd say their portfolio is aligned with where they're trying to go.

We're trying to develop a winning strategy. Our investment approach comes from a method, and although it's boring and not exciting, it works. On the flip side, if you want to try to get the highest return year in and year out, that can be an exciting game. For example, you go to the casino and you're at the roulette table. This might be a bad example, but you're at the roulette table with 50 chips. You could put all 50 chips on one number, or you could spread the chips out. Obviously, if you put all 50 on one number, there's a much greater reward, but there's a much greater risk, because the odds of that number hitting are very low.

It's helpful to know how an aligned portfolio works behind the scenes. When you look at your portfolio with this perspective, the entire investing experience changes. Markets will still move. Headlines will still come and go. Every year is still going to look a bit different. But the difference is how you respond when something big happens: an election, a rate change, a coronavirus. The instinct is to do something, because it's a threat. Your brain is trying to get you to react, to sell, to move to cash, to protect what you have. Hurry before you lose it. It can feel emotional. But when something big happens and we have a conversation like the one we just went through, you can remind yourself that your portfolio was built to weather storms. It wasn't designed to predict every shift or every downturn, that's almost impossible. It was designed to hold together through periods of uncertainty while your plan continues to work in the background.

This perspective makes decisions, I won't say easier, but at least it comes from a grounded place. It reduces the urge to react. It makes it more likely that you're going to be on track. And over time, this consistency, this boring consistency, matters, and it matters more than getting any single call right. If you're like me, we lack patience and we want to make money quick. But is that really the best way? Even if it's just one person listening right now, I'm grateful for you, and I appreciate you. Thank you for listening. Go have a great rest of your week.

Hosted byNick GeorgeCFP®, ChFC®, CLU®, IWA™FounderView bio →

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