Diversification sucks

Let’s face it.  Being a diversified investor is terrible.

1) You will always be worse than the best performing asset class (and you will always compare your performance to the best asset class, because your brain is terribly designed for investing). For this reason your portfolio’s performance will always seem mediocre.

2) You will always be worse than the current “darling” stock of the street.  Maybe it’s Netflix or Tesla. Or rewind 15 years and it’s Amazon and Cisco. Doesn’t matter. You’ll wish you had some of that, and ignore the fact that you also avoided owning things like GT Advanced Technologies, Apple’s glass screen supply partner who just filed for bankruptcy.

3) You will always hate something in your portfolio.  Really, really hate it.  Emerging markets have been a drag on a diversified portfolio for years now. Who is happy that they have owned emerging markets for the last five years? Who is happy they owned REITs in 2013? Who is happy with short term bonds for the past several years? No one.

4) You will never have enough of the good stuff.  US large cap stocks are the place to be? Tech is shooting up? Long-term bonds keep doing well? Why didn’t you own more of that?

5) That part of your portfolio that you love will turn on you in a flash.  You’ll hate it, and you won’t ever remember loving it. International stocks led the charge for years leading up to the financial crisis, and have since been lackluster. We are fickle and almost never satisfied.  We expect good performance and we don’t want to be around for the bad times, as if we can predict or control what happens in the markets.

For these reasons, you will always want to tinkerYou will always think your allocation is wrong (guess what: it is!). You will always feel the pull to chase performance because clearly your strategy is “not working.”

I honestly believe that next to a huge bear market, our current market may be the hardest for a diversified investor to stomach.  The only thing that seems to be “working” is having more exposure to large cap US stocks.  Practically everything else is a drag on performance. And many investors myopically focus on large cap US stocks, via the DJIA or the S&P 500, as “the market.” So as soon as you deviate from the S&P 500 in your portfolio; when you add in international stocks or small cap stocks or REITs or emerging markets, you start to “lose.”

This is why investing is not easy; why successful investors know they have to remain focused on the long term. Owning a diversified portfolio of index funds sounds simple enough, but we are so prone to get in our own way. Hear this: the single worst thing you can do for yourself in an environment like this is to start making changes to your investment policy. (By the way, if you change your investment policy based on market performance, you don’t actually have an investment policy). You don’t need to have the “right” asset allocation (such a thing does not exist), you need to KEEP THE ONE YOU HAVE. If you have thoughtfully constructed a diversified portfolio of investments, nothing is wrong with it. The only thing you can do to make things worse for yourself in the long run is to change your allocation in response to weak performance from certain assets. Don’t do it.

Continue Reading

Your Asset Allocation is Wrong (and so is everyone else’s)

Hold Your Line

Global Diversification: Accepting Good Enough to Avoid Terrible (A Wealth of Common Sense)

search previous next tag category expand menu location phone mail time cart zoom edit close