We will always be worse than the best performing asset class (and will always compare performance to the best asset class, because our brain is terribly designed for investing). For this reason, portfolio’s performance will always seem mediocre.There will always be something that you hate in your portfolio. Really, really hate. Emerging markets and commodities have been a drag on a diversified portfolio for years now. Who is happy that they have owned emerging markets and commodities for the last five years? Who is happy they owned REITs in 2013? Who is happy that they have small value stocks? There will never be 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 we own more of that? Maybe because the future is not predictable; as if anyone can predict or control what happens in the markets.The 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. Us human beings are fickle and almost never satisfied. We expect good performance and we don’t want to be around for the bad times.
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 is prone to get in its 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, changing your investment policy based on market performance really means that you didn’t actually have an investment policy to begin with). 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. If there is a way to improve it by eliminating duplicative holdings or adding meaningful and additional asset class, then it should be done. 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 or chase the outcomes of over performing assets. Don’t do it. Yesterday’s winners can easily become tomorrow’s losers. Do not chase outcomes. Remember that the consensus thinking is more likely to be wrong than right. Contact us now to learn more about true diversification. Take a look here at a 45 year perspective on returns: