Bob Carlson

October 28, 2013

The Desert Island Portfolio

Filed under: Asset Allocation,Investing — Bob @ 12:20 pm

Most investors trade too often. One reason they don’t buy and hold is that their portfolios aren’t properly diversified. Another reason is that they pay too much attention to the headlines and short-term trends instead of putting those aside and focusing on the longer term. Here’s a good discussion of that process, including research indicating that investors who ignore daily headlines achieve better results than others. At Retirement Watch, we have our own Desert Island Portfolio, that I call the “hedge fund” mutual fund portfolio. The portfolio has True Diversification, so that it does well in almost any market and economic environment. You don’t have to worry about the headlines and current trends.

But wait a second! Weren’t U.S. equities up 20% in the first three quarters of this year? That seems to blow a hole in your low return environment thesis, wouldn’t you say?
Actually, it’s not uncommon for stocks to surge ahead, even in secular low return environments. The aptly named “lost decade” of the 2000s witnessed a –1.0% annualized return from the S&P 500 Index. Yet from late 2002 through late 2007, stocks were up over 100% cumulatively. Results like these dupe investors into thinking the low return hubbub is nothing but doomsaying. Likewise, we see other sizeable equity advances in the low return decades of the 1930s and 1970s. It’s human nature to feel good when showered with recent performance windfalls, but they tend to be unsustainable when yields aren’t at levels supportive of long-term advances.

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