By: Edward J. Leach, CFP®, MBA
Admittedly the title of this article is 100% clickbait but hear me out for a moment. What is the one strategy that ensures you have pieces of your portfolio that are winners?
It is not the following:
Valuation Models
Technical Chart Analysis
Computer Algorithms
Hopes and Dreams
Crystal Ball
Following Social Media Investment Influencers (I never thought I would need to write this)
It is:
Diversification
Asset Allocation
Appropriate Risk Management
The problem with always having winners in your portfolio is that you always have the losers. It’s the only way to achieve holding the winners consistently. So, to be a winner over the long term, you must lose sometimes. I grew up playing baseball, and every single team who has ever won the World Series always lost games at some point during the season.
The Periodical Chart of Investment Returns
Since 2003 our team has updated the HFA Periodical Chart of Investment Returns every year where we put together a summary of all the major investable asset classes along with a blended hypothetical diversified portfolio made up of 35% in Global Bonds, 55% in Global Stocks, 5% in Real Estate and 5% in Commodities.
The first chart below illustrates the monthly performance for 2021, with the last column representing the average return for the entire calendar year. The second chart shows the annual performance every year going back to 2003, with the final column representing the average return over the whole period. Each color represents an assets class, with the top row being the best performer and the bottom row being the worst performer.
Source: DFA Returns Web, US Bonds: Bloomberg Barclays US Aggregate Bond Index, Non-US Bonds: FTSE Non-USD World Government Bond Index hedged to USD, US Large Cap Stocks: Russell 1000 Index, US Small Cap Stocks: Russell 2000 Index, Developed Market Stocks: MSCI EAFE Index Net Dividends, Emerging Market Stocks: MSCI Emerging Markets Index Net Dividends, S&P Global REIT Index Net Dividends, Commodities, Bloomberg Commodity Total Return Index, Diversified Portfolio is made up of 35% FTSE World Government Bond Index, 55% MSCI All Country World Index (net div.), 5% S&P Global REIT Index Net Dividends, 5% Bloomberg Commodity Total Return Index. Past performance may not be indicative of future results. Indexes are not available for direct investment. All investing involves risks, including the potential for loss of principal. There is no guarantee that diversification or any other strategy will be successful. Diversified portfolio is for illustration purposes only and does not represent any specific portfolio managed by Highland Financial Advisors.
Source: DFA Returns Web, US Bonds: Bloomberg Barclays US Aggregate Bond Index, Non-US Bonds: FTSE Non-USD World Government Bond Index hedged to USD, US Large Cap Stocks: Russell 1000 Index, US Small Cap Stocks: Russell 2000 Index, Developed Market Stocks: MSCI EAFE Index Net Dividends, Emerging Market Stocks: MSCI Emerging Markets Index Net Dividends, S&P Global REIT Index Net Dividends, Commodities, Bloomberg Commodity Total Return Index, Diversified Portfolio is made up of 35% FTSE World Government Bond Index, 55% MSCI All Country World Index (net div.), 5% S&P Global REIT Index Net Dividends, 5% Bloomberg Commodity Total Return Index. Past performance may not be indicative of future results. Indexes are not available for direct investment. All investing involves risks, including the potential for loss of principal. There is no guarantee that diversification or any other strategy will be successful. Diversified portfolio is for illustration purposes only and does not represent any specific portfolio managed by Highland Financial Advisors.
The only color that is never in the bottom row or the top row is – you guessed it: The Diversified Portfolio.
Having a disciplined long-term diversified approach to investing with at least 90% of your portfolio ensures you capture the winners every month and every year. It also is the approach that puts you in the best position to achieve your long-term goals.
In addition, if appropriate, this diversified approach provides the option to “sprinkle in” exposure to concentrated volatile assets classes like innovative stocks in the US and abroad and exposure to cryptocurrencies if you have the risk appetite. There is nothing wrong with having the “sexy” investments in your portfolio – just do it responsibly.
The only trade-off you make by being diversified, holding the winners, and on the path to achieving your long-term goals is you will also have to be invested in the losers, which means you will ALWAYS be asking why we own something in your portfolio.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
Ed Leach, CFP®, MBA is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their business while creating efficiencies in their business and personal financial plans. He is, also, a member of NAPFA which is dedicated to serving fee only advisors.