Study the table of asset class returns below. It is one of the most important graphics you’ll ever see in investing.

Created by Vanguard, the table ranks several of the main asset classes by historical performance – from best to worst – for each of the past 15 years.

• For instance, you can see that in 2014 North American equities were the best performer, delivering a return of 19.6%.

• The worst performer that year, and thus at the bottom of the 2014 column, were European equities. They returned just 0.2%.

The different asset classes are differentiated by colour.

Click to enlarge this table of historical asset class returns.

Source: Vanguard

Hunting high and low

Even without enlarging it you can see the table looks like a patchwork quilt embroidered by a drunken colourblind sailor in the dark.

One year’s winners can be bottom of the class just a year or two later.

Yet equally, sometimes the best performers continue to do better for several years in a row.

This volatility is what makes tactical asset allocation – that is, trying to chop and change ahead of the market – so tempting, and yet equally so difficult.

It’s also why most people are better of not bothering with such second guessing.

A bit of what you fancy does you good

With a well-diversified and occasionally rebalanced passive portfolio, you’ll always have some money invested in the best performing assets in any particular year – albeit at the cost of holding some losers.

And by tweaking your allocations according to your risk appetite – as opposed to doing so to chase higher returns – you can influence the overall volatility.

The big win of this balanced portfolio approach is if you avoid being the schmuck who sells everything when your ultra-risky portfolio plunges in a rough year.

The table shows many instances when hot money would have had a bucket of cold water thrown over it in the following 12 months, scaring many investors into selling – only for the asset class to bounce back the year after that.

It’s the reason for the so-called behaviour gap, which is the repeated observation that real-world investors do much worse than asset class returns would imply.

It’s all due to their woeful attempts at market timing their way in and out of the best investments.

Look at the table again and imagine trying to actively dance your way through its highs and lows.

Do you feel lucky? Well, do you?

Note: I’ll be back later this week with more thoughts on the asset class returns table and tactical allocation strategies, so I am turning the comments off until then.

Good reads from around the Web.

The road to knowing a lot about investing is paved with knowing a little bit.

And as we all know, a little bit of knowledge is a dangerous thing.

I’ve seen the pattern on this very website. A new actively-minded reader will discover Monevator, often via one of my more actively focused articles, and then start commentating on other posts around the site.

They’ll usually state how they’re not stupid enough to put money into bonds or how they’re very cleverly positioned in the investing theme de jour (dividends, gold, and emerging markets at various points over the past few years).

Or, if you go back far enough, you’ll find them saying how unlike those other lemmings they aren’t being fooled by the bull market at all.

(Indeed the Armageddon-blog Zero Hedge now seems to be a support group for these particular people.)

Damascus is lovely at any time of the year

Anyway in time the market does what it does, which is punish over-confidence and piss on hubris.

Usually we don’t hear much from these chastened geniuses again, but a few have become regulars on my co-blogger The Accumulator’s articles. As best I can tell they’ve become largely passive converts.

I don’t point this out to mock them, but rather to applaud them.

For most people true wisdom in investing means coming to understand how little is knowable – especially if you need to slap timing onto the reckoning sheet – and instead focusing on what is controllable (costs, taxes, asset allocation, and your personal savings rate).

If like me you do carry on active investing (and my allusion to the famous old movies is entirely deliberate) then you had best be doing it with a mug of humility on the desk next to you.

It is happening again

One of the most consistent newish investor foibles is a belief that they can perceive market tops that somehow everyone else has missed.

They’ve all seen an asset crash or two and read all the quotes, and they can’t wait to opine that “this time is never different” or “We’ve seen this movie before and it ends badly”.

But we usually haven’t seen exactly this movie. To offer another over-exposed quote, history doesn’t repeat itself, it rhymes.

Markets rise and fall, but if the moves were as easily forecast by people who’ve done little more than read a few articles on Warren Buffett, we wouldn’t get stock market bubbles or busts.

Reality is far trickier, except with hindsight.

The continuing advance of both the US stock market and the bond market are current examples; the strength of London property a longer-standing one that’s totally humbled yours truly.

People have been wrong about these markets for years. Each will someday decline, but someday is another matter.

Boringly true

The brilliant blogger Ben Carlson points out that the quote “I’ve seen this movie before and it ends badly” is almost invariably used by doomster pundits, who are wrong far more frequently than they’re right.

It’s potent because it sounds so sassy and dark.

In reality, anyone who has seen the movie of the markets before knows that – over anything other than the short-term – it mostly doesn’t end badly.

As Carlson says:

No one ever says, “I’ve seen this movie before and it ends with higher dividend yields, lower prices, better valuations and higher expected returns.”

Over the long-term, investing in Western stock markets hasn’t been anything like a movie, but more like a long-running soap opera.

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Good reads from around the Web.

I still get comments incorrectly – and often indignantly – claiming there’s a 10% tax paid on dividends that holding shares in an ISA “no longer” protects you from.

I still read media advice saying the same thing.

Not as often as before, admittedly, mainly because the seed of this misconception was abolished over a decade ago and many of those who bore a grudge have literally moved on (/away!)

But the myth lingers, so I was glad to AIC boss Ian Sayers addressing it this week.

Sayers writes:

Trawl the internet and you will come across many statements like:

 “Apart from dividend income (paid with 10% tax already deducted which can’t be reclaimed), the rest of the income is tax-free”

“Dividends from equities are paid after a ten per cent tax credit has been deducted and ISA investors cannot reclaim this.”

The problem is that these statements are untrue.

Now, I am not criticising anyone for not getting this quite right.  The tax position of dividends is not only complicated but also counter-intuitive. My concern is not simply this is confusing investors, but may be leading some to make the wrong investment decisions, and even pay tax that is not due.

I am also not criticizing anyone who hasn’t read my articles on UK dividends and ISAs for not getting this right.

However if you have read widely and yet you still state the opposite in our comments and wonder why I delete you rather than continue to breath life into this hoary old half-dead Internet-enabled horse, now you know. 🙂

• The AIC has produced a short and clear guide debunking the whole “10% tax” myth, which you can download as a PDF.

Something that is affected by the 10% muddle is your income tax liability.

It’s complicated, but the AIC guide makes a good fist of explaining it.

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