AA rebal
Source: Capital Spectator


A few weeks ago, I spoke at an Financial Advisor conference in Denver. There was some concern about asset allocation returns — it seemed that the more diversified you were, the worse your performance numbers were.

Josh quoted a financial advisor who lamented: “Why bother diversifying at all? It’s just a drag on performance What’s the point of owning any bonds or international stocks?”

Of course, we know how this movie ends: Everyone plows into the big winner — in this case, US equities — just before they mean revert. As we showed earlier this week, no one knows which asset class will be the out-performer each year. So you own all of them, and stop fretting over what is going to be the winner.

A good financial advisor will explain this way in advance — so the first time you think about this isnt when you open your quarterly statement and notice the SPX is kicking your ass this year.

The issue here isn’t the maths — either you understand mean reversion or you don’t — but rather the emotional challenge of sticking with what we know will work.


Category: Asset Allocation, Investing, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

13 Responses to “Spot the Outlier”

  1. MikeNY says:


    In other words: chasing the market = losing money.

  2. TheAcsMan says:

    How in the world could a financial adviser not buy into diversification?

    Reminds me of the shakeout that occured in 1987. For about 5 years or so prior to October 1987 every broker (as they were called back then) who entered the business after 1982 believed that they were God’s gift and that markets could only go higher. I suppose they didn’t teach reversion to the mean in math school back then, but neither those guys nor the portfolios they managed made it to the next bull market.

  3. VennData says:

    Winning isn’t everything, it’s nothing.

    When you “win” in investing who are you beating?

    American mythological insanity.

    • rd says:

      The two primary things I noticed when I moved to the US was the amount of litter and that everything had to be a contest with a “winner”, even if it was just the top vote-getter in a meaningless poll of non-participating observers.

      As our kids got into school and recreational sports activities, that quickly morphed into “everybody gets a trophy” for just showing up. Very little was perceived to be done for the sheer joy and intrinsic physical/intellectual benefits of the activity itself. When I was coaching rec soccer, I tried to distinguish as little as possible between the various kids on the team, giving everybody equal opportunities at all posiitons as you really have no idea how good a 7-year old will be at age 16, but you can sure destroy their confidence at an early age by limiting playing time. At the end of a season, I tried to limit the celebration to high fives and cupcakes all around, but most seasons some parents insisted on having their own celebration handing out participation trophies etc. to the kids which I thought totally missed the point of just going out and playing soccer for fun.

    • Iamthe50percent says:

      Who are you beating? Your counterparty or counterparties, obviously. They sold what subsequently went up or they bought what subsequently went down. You won, they lost. Except in venture capital (old style that funded startups, not today’s vultures) the stock market is a zero-sum game. Only the house (GS) wins in the end.

  4. mllange says:

    The single best source of information I’ve seen with regard to the folly of market timing and maintaining disciplined asset allocation in an investment portfolio is at the excellent IFA.com site, in particular their books reference page: http://www.ifa.com/library/books.asp. The Hebner books are outstanding and those listed with them, while already well known to many, are superb support. I don’t invest with IFA, but I’ve purchased copies of Mark Hebner’s books for several friends. As an aside, most (if not all) of the material found in the Hebner books seems to be freely available via the IFA.com website.

  5. Herman Frank says:

    Yep, I shed crocodile tears looking at the effect of the 5 to 8% dip in an asset class …. it works out to have an effect of about -0.5% on the portfolio. Just noticed that the bonds are paying their dividends. The position is programmed to “re-invest”. Re-investing the dip is good, because it makes for good averaging.

    “He who looks for the winner foregoes the winning stream of steady averaging!”

  6. DeDude says:

    Why bother diversifying at all? It’s just a drag on performance?

    That is a brilliant question – which you should ask anybody who want to advice you on investments.

  7. fiddlercrab says:

    The other outlier is emerging market stocks–all the other negative assets are fixed income. One could argue it’s the more dramatic and more interesting outlier, also.

  8. end game says:

    2000 – 2009
    S&P 500: -1%

  9. ashpelham2 says:

    Had big time wealth advisory firm come into our office this morning and proceed to tell us how they were light years ahead of the standard deviation and maximum drawdowns with their allocations. Told us some obvious facts about how wealthy folks just don’t want to talk about being “down” in the market. I cannot believe, only 5 years out since the biggest market disruption in 2 generations, that people have forgotten those lessons.

    I will continue to remind my investors that they should choose an allocation that suits their taste for risk, and change that taste for risk when their personal life changes, not when the markets change it for them.

  10. end game says:

    2000 – 2009
    S&P 500: -1%/yr.
    60/40: 2.3%/yr.
    Equal weight 16 asset classes: 7.8%/yr.

    Not diversifying was an astounding mistake that decade.

  11. [...] Last week, we noted the US Equity markets have been outperforming the rest of the world by a huge margins (Spot the Outlier). [...]