Diversification and Hindsight

Corey Hoffstein at the Newfound Research Blog recently posted a great article on diversified investing.

Diversification Will Always Disappoint

The key takeaway from my perspective is the acknowledgement that investing in a diversified portfolio can be hard emotionally. When you look at the past performance of a properly diversified allocation the performance you see will always pale in comparison to other investments you could have made (you could have just bought apple on the IPO and enjoyed your 16,000% return…). The challenge, then, for advisors is to articulate to clients why being diversified, even if it makes you feel disappointed when you look at past returns, is most often the prudent course of action.

Of late this has been quite a challenge as US stocks have so thoroughly outperformed other countries that selling a globally diversified strategy has been tougher than usual.

USrets

Despite this we know that the out-performance of one asset class does not persist in perpetuity, and even if it is painful investing in a diversified portfolio is our best hope of long term returns.

 

Nathan Wallace

 

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