Do Not Abandon Your Diversified Strategy
February 5th, 2015
2014 may go down in financial history as the year that a lot of things didn’t happen for investors. For example, despite numerous nervous headlines that it might be best to prepare for the worst, there was no universal stock correction. And despite Federal announcements on tapering quantitative easing in the U.S., there was no major slump in the bond markets.
Another non-event for globally diversified investors was that we were not rewarded with higher annual returns relative to a concentrated, stay-at-home position. Large U.S. companies happened to enjoy a remarkable, double-digit year, even as other markets experienced negative to ho-hum results, especially for international, emerging market and small-cap stocks.
In light of all that did not happen, there is one more thing we hope does not continue to happen. We hope you do not react to the current market by succumbing to two common behavioural biases: Recency, or giving recent events more weight than they deserve; and Tracking-Error Regret, abandoning your personalized diversified portfolio to chase last year’s Old Glory returns.
In his article, “There’s a Perfect Storm Brewing,” financial author Larry Swedroe describes the risks associated with chasing past performance. While the U.S. S&P 500 Index has outperformed the MSCI EAFE (international stock) Index since 2010 by an annualized return of around 9 percent, the MSCI EAFE happened to deliver about the same outperformance in reverse from 2002–2007. Clearly, the tables can turn abruptly and destructively for an undiversified investor. As Swedroe says, “Diversification is like insurance. It’s insurance against having all your eggs in the wrong basket.”
There remains decades of resounding evidence that one year or even several, do not make a strategy. That is why, come what may, we remain as convinced as ever that individualized diversification is the right policy every year. Maintaining a globally diversified portfolio, according to your personal goals and risk tolerances, does not guarantee that you will outperform other lucky scores you might have made instead. But it continues to offer the most rational approach to reaching your desired destination while managing risks along the way.
On another note, we welcomed Sasha Castro to our team in the role of Marketing Liaison in December. As we continue to emphasize our fiduciary role, she will be responsible for managing both internal and external marketing and communications-related activities. We invite you to learn more about Sasha and the rest of the PH Team via our website.
As always, we appreciate your trust and look forward to helping you capitalize your opportunities here in 2015 and beyond!