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Spot the Outlier
Posted By Barry Ritholtz On August 7, 2013 @ 11:30 am In Asset Allocation,Investing,Psychology | Comments Disabled
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.
Article printed from The Big Picture: http://www.ritholtz.com/blog
URL to article: http://www.ritholtz.com/blog/2013/08/spot-the-outlier/
URLs in this post:
 Image: http://www.ritholtz.com/blog/wp-content/uploads/2013/08/AA-rebal.gif
 Capital Spectator: http://www.capitalspectator.com/archives/2013/08/asset_allocatio_17.html#more
 Josh: http://www.thereformedbroker.com/2013/07/25/anecdotally/
 asset class: http://www.ritholtz.com/blog/2013/08/asset-class-returns-2/
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