The “skittles chart” of country returns & country market sizes

behaviorLast week I discussed a skittles chart (periodic table of investment returns) for common indexes and broad asset class returns. Below you will see how returns of various countries compare year by year for both developed and emerging markets.

Yes – it is hard to see specific countries (on purpose) – trying to find a pattern misses the larger point. If you must know though, the U.S. is the darker blue box in upper right corner of the left half of the page. It is at the top of the column in 2013 and 2014; and yes, towards the bottom during most of the 2000’s. Again, just like last week’s skittle chart, the colors fall at random. The same for the emerging market country skittle chart on the right side.

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. In other words, there is a random structure which tricks our brain into trying to find a hidden secret within the design! That is NOT  a prudent investment approach – regardless of what color is labeled what!

Page 2 of the above insert shows the stock market sizes of various countries. The boxes are arranged like a global map. The U.S. represents 52% of the global capitalization. Most people have a much higher concentration of U.S. stock in their portfolios and no where near a 48% allocation to foreign company stocks (you invest in companies headquartered in foreign countries, not in countries themselves (other than through sovereign bonds). The U.S. represents 29% of the total global bond capitalization (page 3 of the insert).

The point of the above is that people have a proximity bias which results in portfolios being skewed away from reality. Home bias and region bias are examples of predictable irrational behavior of investors. Overconfidence also weighs in through the belief that one can predict something closer to home better than abroad (ignoring the fact that predicting either is very difficult if not impossible).

A diversified portfolio is safer – and that means having things in your portfolio that don’t all act the same way at the same time. That is shown above by having all the colors moving around the chart all the time.

So the answer is to first decide on your allocation – and then diversify within that allocation (what’s the different between allocation and diversification?). Money moves around the globe seeking returns. Rather than chasing it each year (and missing the mark most of the time by looking at the skittle charts), simply put a dab of everything in your portfolio and returns show up somewhere in your portfolio as they’re earned there.

Mixing U.S. and global allocation percentages close to the capitalization of the world is a rational starting point – bias and comfort move you from there.

Note that I posted the 2014 chart – on purpose. What is your guess how 2015 will turn out? You see, you can’t help it but to try to guess can you! You trick yourself into thinking that if you know what 2015 is then you can guess what 2016 will be … you can’t! A clear version of the insert is available upon request if you just can’t resist trying to find a pattern.

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  1. The "Skittles Chart" - periodic table of returns | Better Financial Education Blog - May 27, 2018

    […] the colors will magically align after these years? Nope! Randomness is consistently random! Next week’s post will have a country matrix or skittles chart – wait until you see how often the US does, or […]

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