Quarterly Thoughts – Q1 2014

Are there clear patterns of investment market returns over time?  How does a “balanced” portfolio compare to individual asset classes over time?  Our chart entitled “The Periodic Table of Investment Returns – A Case for Diversification Amid Uncertainty” is a colorful illustration that addresses these questions.

People are not naturally wired for investing.  Without discipline, it is human nature to make mental errors, often due to “recency bias” and the “flight” reflex.  Recency bias is the tendency for people to believe that the future will be like the present.  For example, if stocks are hot, the average investor often ignores risk and increases equity holdings.  Then, when a market correction occurs, those that increased their holdings in stocks (i.e. risk) increase their chance of a flight or panic reflex.  The result is often economic damage caused by emotional “buy-high, sell-low” investing.

Rational asset allocation across many styles, and the discipline to re-balance to your asset allocation, is the key to long-term success. A diversified portfolio approach will combine many or all of these and other asset classes (as appropriate for your specific goals) to reduce price fluctuation risk, or “volatility,” and provide a more predictable and smoother financial journey.