The “Quilt”: Providing “Warmth” when an Asset Class Seem Cold

At the start of each calendar year, Harrison Financial Services’ Investment Committee puts forth its “7 Views”, providing a high-level market outlook for the year to come. In 2022 our views include international equity markets outperforming U.S. indices, wide swings among individual stocks and sectors, and U.S. Small and Mid-cap companies benefitting from the accelerated adoption of technologies. While we believe these views hold true for 2022, we wouldn’t necessarily have voiced them for years past and may not voice them for future years either. Why? Because history tells us that asset classes go in and out of favor from one year to the next.

Each year Northwestern Mutual releases “the quilt”, which illustrates the unpredictable nature of markets, but also highlights the resulting “warmth” that can come from diversifying your portfolio. Ranking, from highest to lowest, the total return of various asset classes by color produces a randomized patchwork “quilt”. Follow a single asset class across the 15-year span, and your eyes will dart from the top of the page to the bottom and back again. Just like a hand-made quilt, there is no pattern or order to the squares.

In many cases, an individual who follows one particular asset class might find themselves chasing the winners and selling the losers, often leaving the investor feeling “cold”. For example, investing heavily in international emerging markets in 2018 based on performance the prior year.

Despite the volatility of various markets, you can find “warmth” in the quilt by looking more closely at one particular square – the white, “diversified portfolio”. As the name implies, the diversified portfolio contains a little bit of everything and has the following weightings: 23 percent U.S. Large-Cap; 6 percent U.S. Mid-Cap; 3 percent U.S. Small-Cap; 13 percent International Developed; 6 percent International Emerging; 4 percent Real Estate; 5 percent Commodities; 38 percent Fixed Income (bonds); and 2 percent Cash Alternatives.

Holding both the top-performing asset class and the worst-performing asset class at the same time means a diversified portfolio likely will never finish first in the race of returns, but it also should not finish last. Instead, we believe it should settle comfortably in the middle providing reliability and diminished exposure to risk and volatility. Investors who diversify their portfolios may, over time, find comfort in their investments and realize greater risk adjusted returns.

Investors who diversify their portfolios will, over time, find comfort in their investments and realize greater risk adjusted returns.

The 6-person Investment Committee of Harrison Financial Services makes the asset allocations, portfolio constructions, and tactical decisions to effectively manage the assets for our clients. Learn More.

Diversification and strategic asset allocation do not assure profit or protect against loss.