First and foremost, don’t even think about trying to extrapolate macroeconomic, demographic, and political events into an investment strategy. Say to yourself every day, “I cannot predict the future, therefore I diversify” ~ Bill Bernstein
To start, let me thank Ben Carlson, Charlie Bilello, and Michael Batnick for recent posts and data on the thoughts below as we’ve pointed to data and charts from their posts. This post is an echo of what’s already been said, but it’s worth repeating.
We are not offering our opinion on diversification, but pointing out how difficult a diversified portfolio can be to stick with. Persistent-lopsided returns among asset classes create headaches for advisers around the country, especially when those lopsided returns are skewed towards US Stocks…which is the exact environment we’ve had. Take a look at the chart from Charlie Bilello below to illustrate the dominance of US Stocks vs diversified portfolios…it’s not even close:
International stocks (companies in Europe, Australia, Asia, and the Far East) are typically part of a diversified portfolio, and when you look at this single asset class’ last decade…it’s ugly. As Michael Batnick recently tweeted:
The first question that pops up: Why own anything but US Stocks? The reaction for most investors is to throw in the towel on other asset classes and load up on what’s looked the best recently (performance chasing – the culprit to behavior gaps). Ben Carlson illustrates why that could be an issue:
The lopsided returns as of late have triggered a massive review of what is owned and why it’s owned, both from advisers and their clients. Before eliminating this and adding to that, we would urge all investors to review the evidence and reasoning for owning a diversified portfolio. Let that be the starting point of any portfolio review. More importantly, communicate. What’s in the portfolio, why is it there, when it will look good, when it won’t….lay the groundwork that facilitates successful long term relationships. And remember, simple beats complex.