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Investors Should Be More Like a Postage Stamp
I came across an article today from Larry Swedroe who is one of my favorite authors. In the article he discusses the fallacy of chasing hot investments, sectors, or asset classes. My favorite line from his article is that investors should behave more like a postage stamp. A postage stamp does one thing and one thing very well- it sticks to its letter until it reaches its destination. Investors should create and stick to their investment plan- asset allocation. This plan involves more than just buying and holding your investments. It means reviewing your investments and rebalancing as necessary to bring it back to its targeted levels.
I also recommend the Callan Periodic Table of Investment Returns which is far more interesting than anything you might remember from chemistry class. Whenever I show this to prospective clients I ask them to find the ‘pattern’ in the past returns of previous asset classes. (If you find one, please let me know!) What is really interesting is to view the returns of Emerging Markets over the past two decades. In the 1990s there were five years when this asset class was the worst performing asset class for that year. In the past decade it was at the bottom only once (in 2008) and that interrupted six years where it was the best performing asset class- and boy were those six really good years. When one stares at the ‘colors’ on this table and really thinks about how likely it is that anyone can choose in advance which asset class will do one year versus, it becomes painfully clear that the likelihood of that is close to zero!
My recommendation is to diversify across all asset classes and accept the fact that you will have some of your investments in the best and worst performing asset classes each year. By controlling the things you can control, like investments costs and taxes, and rebalancing as necessary across your investments, you will be far more likely to achieve your goals and reach your destination.