Back to Basics

We came across an insightful comment from Barry Ritholtz of Ritholz Asset management earlier this week and wanted to share it with you. Barry made the following comment “In a diversified portfolio some asset classes will be lagging, and some leading; this is a feature not a bug.” This is something we are very in tune with as we mainly manage globally diversified portfolios. While markets from time to time will exhibit strong tendencies to move in lockstep, over a 5 year period that correlation tends to break down and national markets diverge according to their fundamental drivers.

 

With that being said, it is normal that a portion of the portfolio will not perform well, it may even perform very badly. A recent example would be the stark outperformance of US Equity markets versus Ex-US Equity markets. It is important during these periods to understand it is a normal part of investing and to use this opportunity to rebalance the portfolio into assets which have had negative performance. In tandem with this thought, it’s also crucial to focus on the portfolio return in whole and not that of individual positions. Being mindful of how positions are doing is ok, but given that trading is a suckers bet, it is not prudent to obsess over them.

 

Having reviewed 1,000’s of ways to pick which markets will perform best and not having found any number of indicators or methods that beat buy and hold, we must be mindful to not fall victim to hindsight bias (a technical term for stating what you would have done in the past when you already know the future outcome). Furthermore, Barry chimes in that the best way to achieve investment success is by holding a well-diversified, low cost, global portfolio that has some form of systematic rebalancing. By doing this we rotate out of assets that have worked well and into assets that have performed poorly. Much easier said than done, but surely we believe whole heartedly in what Barry has stated.

 

Barry includes a whole host of other investing pearls in his full article which can be found here http://www.washingtonpost.com/business/get-there/for-investors-its-a-perfect-time-to-go-back-to-the-basics/2014/12/18/2db0ecce-847e-11e4-b9b7-b8632ae73d25_story.html

 

As always we welcome your feedback or questions at markets@pilotage.ch