Decoding Market Volatility: The Power of the Quilt Chart

The wilder the stock market’s movements, the more random these movements can feel. With all the noise, highs and lows, crossed signals, and conflicting conversations, it’s hard to make sense of it all. 

Fortunately, there’s a helpful tool to help dial down the drama and put volatility into a big-picture context. 

We call it the “quilt chart.”

The Quilt Chart: Asset Class Performance 2000–2019

Here’s how it works: Each vertical column represents a year, and each color corresponds to a different asset class—gold for real estate, aqua for U.S. small-cap growth stocks, and so on. Within each year, the asset classes are stacked from best to worst performer. For example, in 2000, U.S. small-cap value stocks led with a 22.8% return, while international emerging markets stocks finished last at -30.8%.

It’s called the “quilt chart” because the results always resemble a random patchwork of colors. We’ve been updating it for years, and it’s always proven a helpful way for clients to visualize three key insights.

1. Chasing last year’s winners is an unhealthy pursuit

People are always coming up with creative ways to stay in shape. But just like with workouts, chasing last year’s winning asset class often doesn’t produce the best results.

In fact, as our quilt chart shows, it can be one of the fastest ways to lose investment muscle. A top performer one year can easily drop to the bottom the next. Just look at emerging markets, which returned +37% in 2017 and -14% in 2018. Or consider real estate’s rise and fall, from +42% in 2006 to -11% in 2007. 

2. Perceived patterns can deceive

It’s also pointless to alter your investment strategy based on multi-year trends that may seem meaningful at the time. Just as toilet paper became America’s hottest commodity in the early days of COVID-19—after years of thankless service—an asset class can be on a tear or adrift for years, only to take an unexpected turn.

On the quilt chart, notice the long losing streak for U.S. large-cap growth stocks in 2001–2006. At the time, the S&P 500 was deep into what would become a “lost decade” of negative returns. We were busy warning investors against giving up on U.S. large caps and piling too heavily into international and emerging markets. In an April 2006 client letter, we pointed out:

Inferior returns, a weakening U.S. dollar, and our country’s mounting budget deficit have caused investors to ignore the stocks of large U.S. companies. This could be a mistake. Six years of little to no growth in stock prices combined with robust corporate earnings growth have left large cap U.S. stocks at their most attractive level in years.

How quickly tables and temptations can turn. Since 2009, U.S. large-caps have consistently ranked among the top performers. In fact, they surged by 26% in Q2 2020 alone, marking their best quarter since 1998. Not surprisingly, we had to remind investors once the surge hit that the U.S. isn’t the world, and global diversification remains as important as ever. 

3. Fixed income still plays a tried-and-true role

When stocks are soaring, it’s easy to overlook fixed income and its stabilizing role in a portfolio. After all, its blue block often lands in the bottom row of our quilt chart—about half the time over the past two decades.

So, why bother with bond investing? Because the quilt chart also shows that while fixed income rarely outperforms the stock market, it almost always delivers something. It’s only failed to do so once in the past 20 years (in 2013).

More importantly, during years when stocks struggle—like in 2002, 2008, and 2015—bonds prove why they retain a rightful spot in most investor’s portfolios. 

We continue to see this play out through the years. When globally diversified stock portfolios fall, high-quality bonds often not only hold their ground, but increase in value—providing much-needed stability during turbulent times. 

Investing for a Prosperous Future

Just like getting a good night’s sleep, eating fruits and vegetables, and staying active are simple yet effective ways to improve your health, managing your investments doesn’t have to be complicated to be successful. 

Here’s our simple financial prescription: Since it’s impossible to predict when various asset classes will have their best and worst years, continue to diversify your holdings to stay covered through it all. Tools like our quilt chart help illustrate the randomness of market returns, so you can keep moving toward your financial goals with confidence.