The “Skittles Chart” – periodic table of returns

leave the pastWhat can we learn when we look at a table of past returns?

  1. Past returns don’t predict future returns.
  2. Over the long term, returns revert to the mean for each asset class of investment.
  3. It pays to diversify (what is the difference between allocation and diversification?).

Here’s a short video that explains the table of investment returns:

Here’s a different table looking at broader asset classes rather than retail indexes  – – and don’t worry about not seeing returns or labels clearly … on purpose … the point is that the colors scatter inconsistently just like throwing skittles on the table. Pick any color and you can see it moves around the chart. What happened last year is unlikely to be repeated … things change.

In other words, there is a random structure which tricks our brain into trying to find a hidden secret within the design (and trying to do that makes you miss the broader point of randomness of ALL colors)! That is NOT  a prudent investment approach – regardless of what color is labeled what!

Nobody can predict the future at anytime based on past returns! Period! So how to invest? Structure your affairs based on evidence (see prior 4 posts) and how you need them to be structured for your specific and unique situation.
Note that I posted the 2014 skittles chart – on purpose. What is your guess how 2015 will turn out, or even better, 2016? You see, you can’t help it but to try to guess (and I’ll bet you’re anchoring your guesses to the more recent results t00)! You trick yourself into thinking that if you know what 2015 is then you can guess what 2016 will be … you can’t! If you’d like to see a slightly clearer chart – here’s a 2013 chart post where the order of the colors changed between 2013 and 2014.
Next week’s post will have a country matrix or skittles chart – wait until you see how often the US does, or doesn’t do as well as other countries!

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