Diversification: Nobody Likes to Get Rich Slowly | Zach Miller
See the full episode notes HERE
The markets have begun to level out with conflicting forces from the government taking shape. So, in this week’s AWM Insights, Brandon Averill, Erik Averill and Justin Dyer get you caught up on everything happening within the markets and why you should never overreact. Plus, why you should always be planning financially for something like a global pandemic. Here is a breakdown of the 5 key takeaways from the episode:
Brandon, Erik, and Justin discuss the headlines driving recent market moves. There is no shortage of news flow, whether election related, the recent vaccine announcements, the treasury ending several of their lending programs, or the addition of Tesla to the S&P500. “This time in the markets, where the direction is really unknown, is fascinating to look at from a news standpoint, but Brandon you’re totally right, time’s like this make it so apparent that being a long-term investor is the way to go. Just predicting which way markets are going to go is a fool’s errand” as Justin emphasizes the focus on long-term investing. Short-term market moves are unpredictable. Only over long periods of time does the data show that equity investors are rewarded for the risk taken. If you are not able to stay invested for those long time periods, total returns will suffer.
Is now the time to be buying Tesla as it’s set to be added to the S&P 500 index in December? The real question is: where were you the last 10 years as Tesla has been a public company since 2010? Brandon explains a common problem with just buying an S&P 500 index fund: “An interesting conversation around the reconstitution is the fact these indexes out there have to add Tesla to the pool of investments to reduce their tracking highlights some of the problems with a straight index approach.” What Brandon says here, and Justin discusses in more detail, is that certain index funds and even active managers that are really just closet indexers, are now forced to buy Tesla after an incredible run in the last year. If your investment philosophy involves reading headlines that everyone else has the same access to, then you may need to rethink your strategy. Be careful of soundbites that may sound good but unnecessarily expose you to excessive concentration risk.
Global diversification and avoiding a lost decade like the US market in the early 2000s or what has happened to Japan’s Nikkei should be considered in your portfolio. “It goes back to higher expected returns, if you’re looking at a portfolio, you’re looking for it long term. We know we can’t miss. We can’t miss days in the market, if you’re trying to time getting in and out. You can’t miss markets whether that’s international vs domestic. And you can’t miss companies. Any of those big misses are severely going to impact you. Having that global diversification, just make sure you’re mitigating your risk and improving your risk-adjusted returns” as Brandon explains. Many investors may not even realize they lack proper diversification. Home country bias is evident in most portfolios and ignores international markets that may deliver higher expected returns. “Diversification is the one free lunch investors have, so why not take advantage of it in a thoughtful way. I will add that emerging markets, while very risky, provide probably the highest expected return in a portfolio. So, having a nice allocation there makes a ton of sense, especially again for the long-term investor. We underscore that time and time again” Justin explains. Due to recent outperformance of US markets many investors have little or no allocation to international developed or emerging markets. Be aware of this recency bias as the US will not always outperform.
Market timing is a tough game and even the best can be wrong for years. Any investor that bailed on the market in March is going to find it extraordinarily difficult to get back in now. “He’s devastated because one of his partners convinced him to take their money out the market. This money is in his tax-deferred account. He is terrified to get back in.” Erik knows this is a failure of not having a proper financial plan with an adequate protective reserve. Avoiding these kinds of value destructive decisions is where a wealth advisor can really deliver results that most people do not realize.
Erik mentions a quote from Warren Buffett on why his investing strategy is so simple yet still works: “Nobody likes to get rich slowly”. Erik then explains the fundamentals professional investors are focused on “We are long-term focused, we diversify, we understand what are the drivers of returns, what are sources of returns, and how do we allocate our plan to help us achieve the outcomes that we want based off of those investments”. It really is as simple as that.
