Three Time-Tested Behaviors
These three values are coupled with the three behaviors that can carry an investor into the 99th percentile of lifetime returns: asset allocation, diversification, and rebalancing.
Asset Allocation is the key to exceptional portfolio construction. In their landmark study in 1986, Brinson, Hood, & Beebower demonstrated that more than 93 percent of long-term institutional portfolio returns came from asset allocation, while securities selection and market timing were responsible for just 7% of returns. Unfortunately the media likes to stand the truth on its head and natter on about what stocks are hot, and whether it’s time to jump into or out of particular sectors. We are convinced that asset allocation is - and always will be - the dominant variable in portfolio returns, no matter what the pundits proclaim.
Diversification* is another critical behavior for investors who seek superior results. Constructing a diversified portfolio and staying diversified keeps you from betting the ranch on a fad at a market top or hiding out in cash at a bottom. We like to think of diversification as the embodiment of Aesop’s tortoise: it is slow and steady and it always wins the race.
Although it’s tempting to put your eggs in one basket when a particular investment, sector, or stock is performing well, few parts of the market accelerate or retreat at the same time. One asset class may outperform another when the economy is stagnating, and then underperform significantly when the economy starts galloping forward. One investment company may lead their peers for three years running, only to deliver lackluster returns the fourth year because some of their investment theses take longer than expected to develop. One stock may go to the moon for several months, but crash and burn in a few days if the sector suddenly falls out of favor. Missing the highest highs can be painful, but not nearly as painful as capturing the lowest lows. Diversification is a conscious decision to give up making a killing in return for the priceless blessing of not getting killed.
Rebalancing keeps your asset allocation and diversification strategies on track. Sometimes a portfolio gets lopsided, usually because one of the investments has gone up spectacularly and not much else has. The typical investor’s response is to sell out of the laggards and funnel assets over to the fastest moving parts of the portfolio, which is the equivalent of electing to be the hare in Aesop’s fable. This is because far too many investors are actually speculators.
Speculators chase stock price trends. Investors search for neglected values or overlooked opportunities. A speculator doesn’t grasp that price and value are inversely related. An investor hunts for bargains. Throwing all your money on a winning horse until it loses is speculation. Taking some profits from a front runner and redeploying them into slower moving areas of the portfolio is investing. Rebalancing may be counter intuitive, but it is a powerful tool for investors seeking sustainable portfolio growth.
At DeYoe Wealth Management, we encourage our clients to stay true to the values and behaviors we know can bring them personal fulfillment and long-term confidence in their investments: Faith, Patience, and Discipline, supported by Asset Allocation, Diversification, and Rebalancing.* Our goal is to help you and your financial plan stay on course. When tumultuous waves of euphoria or anxiety wash over the financial markets, we want to be your lighthouse, guiding you and your family towards financial independence for generations to come.
* No strategy can protect against a profit or a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.