We all know that markets ebb and flow; markets experience upward and downward volatility. However, I have noticed that there are two times in an investment cycle when investors focus somewhat obsessively on returns: (1) When the market is really down–think 2008; and (2) when the market is really soaring–like the last year or so. The market is at an all time high! This is great news and should be the cause of celebration. However, many investors fall prey to what Alan Greenspan called “Irrational Exuberance” and allow their current emotions for greater return (what behavioral finance researchers call ‘investor greed’) to get the better of them.
Over the last few week, I have spoken with several investors who are experiencing portfolio remorse. They are sad because their balanced portfolio is only up 10 or 20%. They say things like: “I was speaking with my _________ (fill in the blank), and they told me my portfolio should be doing better–especially in this market. My account should be up 20 or 25%”.
I am afraid that this type of thinking can cause some investors to make poor decisions and chase returns–after the fact. When an investor says: ?My account should be doing better in this market”, I worry that the investor does not really understand that wealth is created by consistency of returns and not chasing the highest return possible in a given time period.
If we look at last quarter’s returns–International Equity Emerging Markets was up a staggering 36.7%—WOW!!!–every portfolio I manage has some exposure to this asset classes. The more aggressive the portfolio, the more exposure you have to this and other more volatile asset classes. However, one of the costs of diversification is that you also have fixed income/bonds and 18 other distinct asset classes in your portfolio which balance out the higher performing asset classes. We do this because we never know what asset classes will be the highest performing asset classes in the FUTURE!
I a afraid that in today’s environment there is a danger that some investors may repeat the same mistakes as in the past. When stocks have risen 19 out of the last 20 quarters, it can be very easy to ignore the downside risk or equities and try to ride the current wave of excellent returns.
I believe that prudent investors do well to choose a financial strategy that resonates with their true risk tolerance and investment time horizon and stick with it! Chasing performance and taking on additional risk because the market is currently up is a risky game. Historically speaking, this type of investor behavior usually reduces an investors’ real long-term return.
Consistency of returns may be boring, but it is I believe the most prudent way to build wealth over time. Please contact me if you want to discuss your portfolio.
Thank you again!