Why 60/40 Portfolio: Diversification Sucks

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60/40 Portfolio: Diversification Sucks by Attain Capital

With US Stocks pushing up to new all time highs once again this week, we’re seeing more talk of going with simple over complex, just doing the basic 60/40 portfolio, and so forth. We’re seeing more of the feeling – “Diversification Sucks! I would be waaaaaaaay better if was just 100% long US Stocks… or even better, 150% or 250% long.”

We had some clever things to say on this topic, but found the following post out there by James Osborne of Bason Asset Management (from a few months ago) which said it much better:


Let’s face it. Being a diversified investor is terrible.

1) You will always be worse than the best performing asset class (and you will always compare your performance to the best asset class, because your brain is terribly designed for investing). For this reason your portfolio’s performance will always seem mediocre.

2) You will always be worse than the current “darling” stock of the street. Maybe it’s Netflix or Tesla. Or rewind 15 years and it’s Amazon and Cisco. Doesn’t matter. You’ll wish you had some of that, and ignore the fact that you also avoided owning things like GT Advanced Technologies, Apple’s glass screen supply partner who just filed for bankruptcy.

3) You will always hate something in your portfolio. Really, really hate it. Emerging markets have been a drag on a diversified portfolio for years now. Who is happy that they have owned emerging markets for the last five years? Who is happy they owned REITs in 2013? Who is happy with short term bonds for the past several years? No one.

4) You will never have enough of the good stuff. US large cap stocks are the place to be? Tech is shooting up? Long-term bonds keep doing well? Why didn’t you own more of that?

5) That part of your portfolio that you love will turn on you in a flash. You’ll hate it, and you won’t ever remember loving it. International stocks led the charge for years leading up to the financial crisis, and have since been lackluster. We are fickle and almost never satisfied. We expect good performance and we don’t want to be around for the bad times, as if we can predict or control what happens in the markets.

For these reasons, you will always want to tinker. You will always think your allocation is wrong (guess what: it is!). You will always feel the pull to chase performance because clearly your strategy is “not working.”

I honestly believe that next to a huge bear market, our current market may be the hardest for a diversified investor to stomach. The only thing that seems to be “working” is having more exposure to large cap US stocks. Practically everything else is a drag on performance. And many investors myopically focus on large cap US stocks, via the DJIA or the S&P 500, as “the market.” So as soon as you deviate from the S&P 500 in your portfolio; when you add in international stocks or small cap stocks or REITs or emerging markets, you start to “lose.”

This is why investing is not easy; why successful investors know they have to remain focused on the long term. Owning a diversified portfolio of index funds sounds simple enough, but we are so prone to get in our own way. Hear this: the single worst thing you can do for yourself in an environment like this is to start making changes to your investment policy. (By the way, if you change your investment policy based on market performance, you don’t actually have an investment policy). You don’t need to have the “right” asset allocation (such a thing does not exist), you need to KEEP THE ONE YOU HAVE. If you have thoughtfully constructed a diversified portfolio of investments, nothing is wrong with it. The only thing you can do to make things worse for yourself in the long run is to change your allocation in response to weak performance from certain assets. Don’t do it.

Couldn’t have said it much better ourselves. And here’s the crazy thing, we’re saying it when our preferred diversifier – managed futures – is doing quite well, thank you (up 15.67% last year and 2.10% through Feb 17th, according to the Newedge CTA Index) {past performance is not necessarily indicative of future results). We’re saying it because we know trees don’t grow to the sky (despite the 2009-present evidence to the contrary in US Stocks). We’re saying it because stocks are due for a pull back. Bonds are due for just had a pull back. And yes, even Managed Futures are due for a pull back, especially the bond heavy systematic guys (they’re pulling back already in Fen thanks to that bond market reversal).

So enjoy it while it lasts, and curse your diversification strategy as ‘sucky’, but just make sure it’s complaining only, and not action following the complaining. Because that’s when your sucky diversification actually becomes bad, that’s when you’ll turn off your protection just before it’s needed most.

Here’s a linkfest to Value Investing, Diversification and the grand ol’ Stock vs. Managed Futures debate.

1. Sell Everything and Buy Stocks
2. Sell Everything and Buy Stocks 2
3. Why Am I Diversifying Again?
4. Why Value Investing is So Hard (Managed Futures Style)
5. Even Bad Diversification Works
6. Pursuing Portfolio Perfection
7. Rethinking the Efficient Frontier
8. The Efficient Frontier
9. The Efficient Frontier Part 2
10. Did He Just Say Diversification Was Broken?
11. Diversification: Giving up Home Runs, to Avoid Futures Strikeouts
12. Would’a Could’a Should’a
13. Do Investors Really Have To Choose Between Rotten Eggs?
14. Same Shift, Different Color: Traditional 401(k) “Diversification”
15. 5 Questions Every Investor Needs to Answer

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