Every week I discuss the advantages of following the three simple rules of investing:
- Own equities and high quality short term fixed income.
- Globally diversify.
- Rebalance.
Very simple indeed until being globally diversified results in performance less than the U.S. Large cap asset class. Because we see large cap stocks every night on the news we compare our results to the DOW and the S&P 500.
As humans we avoid pain and are drawn to pleasure. It is a natural thing. When we see the U.S. large cap earning a great return while small, international and emerging markets are lagging. We wonder why not invest all my money into U.S. Large Cap.
Keep in mind the financial media focuses on the Dow and S&P 500.
On the flip side when small, international or emerging markets are out performing we think nothing of it because we don’t know. Consider this since 2000 the S&P500 has been the best performing asset class three years. And the worst performing asset class for five years. The rest somewhere in between.
Perhaps another small history lesson will help you realize the value of a globally diversified portfolio.
From 1996-2000 the S&P 500 earned a cumulative 132% while Emerging market small value stocks lost -49%.
Naturally at the end of 2000 investors would want to invest all their money into the S&P500 Large Cap stocks(Pleasure) and avoid emerging market small value(Pain). The next five years, included the tech bubble bursting. As I mention often no one can consistently predict the future.
Let’s see how that worked out for investors. From 2001-2005 the S&P 500 earned a cumulative 3% while Emerging market small value stocks earned cumulative 162%. That didn’t work out well at all.
Naturally, I cannot predict that this will happen again because past performance is no indication of future results.
The point is no one can predict which asset class will outperform and for how long. When someone does make an accurate prediction it is a matter of luck and not skill. When you consider all the analysts on Wall Street all making their own predictions. In any given year someone will be right. The problem is we never know which one is right in advance.
On another point I find it fascinating that investors see crashes of the past as buying opportunities and current or future crashes as risk. It is interesting how the human mind works. OK now I’m rambling.
It is times like these that investors really need an investor coach the most. A coach will help you control your emotions. Right now the emotion is greed. Even though allocating all your investments to U.S. large cap might sound logical it is not.
Your coach along with your investment policy statement should guide you through all market conditions.
Don’t empower the Wall Street bullies and hire an investor coach/fiduciary adviser.
As always I welcome any questions or comments.
