Play the jelly bean game

If you read last month’s article, Three rants and a story, you’ll know that diversification doesn’t mean splitting your funds so they are invested by various different experts. And, if you’re a regular reader, you’ll know I often have a go at active fund management.

For a change, this article isn’t beating up active fund managers. This time, we’re beating up asset allocators! Asset allocation is the split between equities, bonds and other assets within your portfolio.

Have a look at this ‘jelly bean chart’ from our friends at Vanguard, showing the performance of various asset classes over the past ten years.

Jelly bean chart

Here’s the game.

First, draw (or imagine) a line linking European equities over time (dark grey beans). You’ll see there’s a zig-zag from 6.6 in 2010 to 7.8 in 2020 via a high of 17.4 and a low of -1.4.

Now draw a line linking Developed Asia equities (black beans). That line goes up and down a lot too.

This shows that persistence is fleeting. The top performer in one year often falls to the bottom of the rankings the next year.

Can you think of any rhyme or reason to explain why this is? Probably not. Because no one can.

This is why it’s hard for investors to pick reliable fund managers, and why fund managers can’t consistently predict the best performing sector.

Finally, draw a line linking global equities (light grey beans). You’ll see this follows a more middling pattern.

This means, when you buy a diversified portfolio of global equities, the peaks and troughs are less dramatic and you get a smoother ride.

Related reading

This advice links to what I’ve written before about market timing – remember, I don’t advocate this.

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100