Spot the Outlier

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.


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