Prediction 2022 Based Upon the Callan Chart

The Callan Chart demonstrates that humans are pattern-seeking animals. From Rorschach tests to animals seen in clouds, we seek to impose structure and design where there is none. So too, with investors and the Callan Chart. 

People try to predict the future by looking at past performance.

The Callan Chart ranks annual returns for different asset classes over the last two decades. Lessons from the past are plenty for the investor, though as of yet, the future is insoluble.

Formally known as the Periodic Table of Investment Returns 2022 or the Callen Periodic Table, let’s look at the past to see what we can learn about 2022 and beyond.

The Callan Periodic Table 2022

 

Above, find the Callan Periodic Table 2022 in all its glory! Look for trends. Find patterns. Then continue reading.

Large Cap Growth has done great this decade! Look at the orange along the top! However, also notice it performed the worst in 2016 and 2022.

Patterns are everywhere when you look at the table in the traditional view.

Let’s have a different look at the Callan Periodic Table.

The Callan Periodic Table Ranked Relative to Zero

This is a less-traditional view of the Callan Periodic Table but more instructive. The black line dominates this figure: positive returns are above and negative below.

It is more difficult to find patterns in the undulating rows.

Three of the years had positive returns for all the asset classes! On the flip side, even the worse years have winning asset classes.

What other patterns do you see?

Rank Ordering the Callan Periodic Table

Above, you can see the order asset classes finished during the last decade. In parentheses is the average spot out of 10. So, for instance, large-cap is first and, on average, is 3.6 of the nine asset classes.

Small-cap is next, followed by REITs. Finally, emerging and international equities lag.

Interestingly, the last five years were similar to the previous ten years. Large and small-cap US stocks did even better, and Emerging markets and international equity did even worse.

What about the decade before the last?

Rank Order from 1999-2008

Going back another decade, we can see the rank order is quite different!

Here, Emerging markets win, followed by Real Estate and Small Cap. Large Cap is last!

The ten vs. 5-year results are a little different, as can be seen. During those five years, from 2004-to 2008, international equities did pretty well, and the US not so much.

Lessons from the Past via the Callan Chart

So, what can we learn about the future by looking at the past via the Callan Chart?

Lesson 1:

Nobody knows which horse is going to win this year’s race. There is no future predictive value of the Callan Periodic Table. What does this mean? Past performance doesn’t mean much for the future. Don’t buy last year’s winners.

Predicting the future is easy: no one can do it. So run from anyone who tries to predict future returns.

Lesson 2:

Diversification leads to lower returns but higher risk-adjusted returns. People often get this wrong. They think diversification in their assets will lead to higher returns. Concentration—in the right funds—leads to higher returns. This is why owners of winning companies are the wealthiest people around. However, diversification leads to higher risk-adjusted returns. You want to permanently own all the winners all the time (and, unfortunately, all the losers too). And then rebalance.

Lesson 3:

Rebalance! This is a tricky one. Rebalancing too often stunts your winners. But eventually, winners revert to the mean. So, how often should you rebalance? You decide if you should rebalance.

Lesson 4:

Chase performance! Unfortunately, most investors follow this advice. They invest in last year’s winners.

Momentum is important. You can get greater returns on the back of last year’s winners until a certain point. Then they should revert to the mean. Stay invested in the winners too.

Lesson 5:

Don’t underweight what isn’t sexy! How about that for a triple-negative… But, trying not to be prescriptive, a triple-negative works best here. Is “overweight what isn’t sexy” or “underweight what is sexy” better?

The lesson here is to stick to your guns. Keep it up if your programmed asset allocation from your Investor Policy Statement includes international equities! This has been a losing decade for international equities, but that’s the point. Will the US continue to out-compete all competitors for the rest of history?

Don’t Underweight What Isn’t Sexy

This is the lesson of the Callan Periodic Table. Keep investing in what performed poorly last year. It will cycle back to the top again at some point. Buy low; sell high.

Investing Prediction for 2022 Based Upon the Callan Periodic Table

Stocks and bonds will go up and down. As a result, some people will make money, and some will lose money.

Who knows with more certainty than that? The Callan Periodic Table of Investment Returns doesn’t.

When looking at Callan Chart, don’t look for trends; rather, see principles.

Trends come and go; principled investing stands the test of time.