Callan Periodic Table of Investment Returns

Earlier this year, my colleague send me this Periodic Table:

Callan Periodic Table of Investment Returns 2013_Page_1

Here’s what it says at the bottom:

The Callan Periodic Table of Investment Returns conveys the strong case for diversification across asset classes (stocks vs. bonds), investment styles (growth vs. value), capitalizations (large vs. small), and equity markets (U.S. vs. international). The Table highlights the uncertainty inherent in all capital markets. Rankings change every year. Also noteworthy is the difference between absolute and relative performance, as returns for the top-performing asset class span a wide range over the past 20 years.

Key takeaway: it is more important to diversify your investments than to try to pick the next “Apple stock.”


Investment Recommendations

I am not yet qualified to be recommending specific stocks or mutual funds for you to invest in.  But J.D. Roth from Get Rich Slowly surely is.  In his post The Sheep and the Wolves: Smart investing made simple, Roth does a great job illustrating the basic concepts of investing along with providing some specific fund recommendations.  So if you already have a retirement and/or taxable account set up but you’re at a loss as to what to invest in, why not start with his picks?  He backs his suggestions up with some pretty sound facts.

Asset Allocation

Asset allocation refers to the percentage of money you should put into each type of investment.  The asset allocation for your retirement account should be different than the asset allocation for your investment account because the assumption is you will not be needing the money in your retirement account for a long time (30+ years) but you may or may not need the money in your investment account in the next few years.

For your investment account, you should have an asset allocation that reflects your risk tolerance.  If you don’t know what your risk tolerance is, think about your gambling style.  Do you tend to play it safe (low-risk tolerance)?  Or are you a double or nothing kind of person (high-risk tolerance)?  There are also tests you can take to help you get an idea.  Even if you are a conservative investor, you should keep very little in cash/cash-equivalents unless you plan on making a big purchase soon.  Your emergency fund should be enough to cover any unexpected cash needs.

For your retirement account, you should have all or almost all of your investments in equities regardless of your risk tolerance.  This is assuming you’re a millennial and won’t be retiring soon.  Even though you could lose a lot of money in the short run with equities, your portfolio has plenty of time to bounce back.  And like I mentioned before, equities have unlimited potential for growth and will thus, protect you from inflation way better than bonds will.  But the closer you get to retirement, the less you should have in equities and the more you should have in bonds.

3 Main Types of Investments

The three main types of investments are equities, fixed-income and cash/cash-equivalents.

Stocks and mutual funds are two very popular examples of equities.  They’re what we’re most familiar with when we think of “investing” or “the stock market” (Apple stock, Google stock, Facebook stock, etc.).  When you invest in equities, your main goal is to make money through the growth of these stocks and/or mutual funds.  Even though there is an unlimited amount of money you could potentially make investing in equities, the trade off is it’s a bit of a gamble.  You could also lose most (or all) of your money too.

Fixed-income most often refer to bonds.  Bonds are basically when a government or corporation pays you interest for letting them borrow your money.  Bonds will give you a pretty predictable amount of income at regular intervals like 5% every 6 months.  The steady stream of income you get from bonds makes it a “safer” investment than equities.  But they will never grow like equities so don’t expect to get rich overnight from this type of investment.

Cash is pretty self-explanatory.  Cash-equivalents refer to investments that can be easily converted into cash without losing value (like bank CDs and T-bills).

Now that you know what the 3 most common types of asset classes are, next time we’ll cover how much money you should invest in each group.  The investment lingo for this is asset allocation.



Regardless of whether you’re investing in a retirement account or in an investment account, you should always diversify.  Diversification in its simplest terms means NOT putting all your eggs in one basket.  So putting all your money in Google’s stock…bad idea.

Here is an example of what is and what isn’t diversification:

Let’s say you have $100,000 to invest.  If you invest $50,000 in McDonald’s stock and $50,000 in Wendy’s stock.  That is not really diversifying even though you own 2 different stocks because both of them are fast-food companies.  If everyone decided to give up fast-food, both McDonald’s stock and Wendy’s stock would go down and your entire portfolio (account) would lose a lot of money.  You probably would’ve lost just as much money as someone who put all $100,000 in McDonald’s stock (i.e. “put all their eggs in one basket”).

But let’s say you put $50,000 in McDonald’s stock and then $50,000 in Target stock instead.  That would be considered diversifying because the two companies are not in the same industry.  If the fast food industry was going down, your portfolio will still lose money but not as much as someone who had all their money in McDonald’s and/or Wendy’s.

So as a rule of thumb, the less your stocks relate to one another, the more diversified you are.

First Step to Investing – Opening a Brokerage Account

Once you have a chunk of money saved that you won’t be needing for your expenses, emergency fund or retirement, you can open an investment account, which is also known as a brokerage account.  I use Charles Schwab because that’s what my company uses for all its employees and clients.

Instead of just using what I have, you should do some comparison shopping.  Comparing brokerage firms is kind of like comparing banks (Bank of America, Chase, Wells Fargo, etc.).  There are several factors to consider like minimums, fees and customer service.

NerdWallet does a great job of pinpointing what you should look for in a brokerage firm if this is your first time investing:

  • Commission-free mutual funds and ETFs with low expense ratios
  • Customer service (with access to brick and mortar branches)
  • Easy-to-use online interface
  • Low account minimums and no account inactivity fees

They ranked TD Ameritrade as best broker, especially for first-time investors.

I found a great comparison chart on The Motley Fool.  Just taking a quick look at the chart shows me that TD Ameritrade might in fact be the best option since it has lower minimum requirements than the other firms.

Once you select a firm, I recommend going to a physical branch and opening your account with a representative.  They will help you set up the account, transfer your money over and you can ask them any questions you have.

The next step in the investing process is selecting stocks and/or mutual funds to invest in, which I will cover in the next few posts.