If You Learn One Thing About Investing This Year, This Should Be It

I recently spent three days at the SEI Strategic Advisor Council National Meeting, where leaders from SEI's Investment Management, Practice Management, Technology, and Trust Company segments provided us with a wealth of information and updates. While most of the information is probably not of interest to my typical client ("that's why we have you!"), there was one presentation in particular that could be of incredible value to you. 

Over the past few years, the investment world has been a strange place. While asset classes typically move in and out of favor year to year as the chart from SEI below shows, large US stocks (as highlighted by the yellow blocks) have been one of the best performing asset classes for three straight years. To show what normal "in and out of favor movement" looks like I also highlighted international stocks, which have done better than US stocks in 8 of 15 years, worse in 7 of 15 years. 

This three year run is very uncommon, and the staggering difference in performance (36% better than foreign stocks, 71% better than emerging market stocks, 96% better than commodities!) begs the question of why not just have all our money in large US stocks? 

This is a very common reaction among investors, following the momentum by buying whatever stock or asset class that has done well recently, so you're not alone in posing that question.  

Sometimes investors will do the opposite and take a contrarian view, looking to buy whatever did the worst the prior year figuring on a rebound. 

And some investors, myself included, believe a diversified portfolio spread across a variety of stocks and bonds is the best approach, offering less risk and better returns over time.

So in light of this unusual outperformance of one part of the investment world, SEI tested all three strategies (momentum, contrarian, and diversified) to see what the real world risk and return would look like. The results were a real eye-opener:

What this study shows is that spreading your money equally across all of the asset classes generated a fifteen-year return that was higher than either the momentum (best of previous year) or contrarian (worst of previous year) approach, and with much less volatility (risk).  

Of course there's an incredible amount of media effort, newsletter solicitations, and natural emotional temptation to forecast markets and predict the future. Just think about this 15 year period in the study: in 2000, everyone believed dot-com stocks were the road to riches, then in 2005 it was real estate, then in 2008 it was cash. But as this simple study shows, the most successful investors are often the ones who stick to a diversified investment approach suited to their goals and risk appetite.

This presentation was one of the most talked about among the 150 top-flight financial planners attending the conference, and I'd encourage you to absorb this info and ask me questions if you have any. For more information I also have a research piece from SEI on my website, you can click here to access it. 

Kevin Kennedy, CFP®