Content provided by Josh Jenkins, CLS Associate Portfolio Manager
Last month, Portfolio Manager Grant Engelbart contributed to this blog, an entry titled Emotional Volatility. In it, Engelbart advocated a pragmatic approach to managing ones wealth. One that ignores the endless volume of market noise and the visceral and often illogical decisions it promotes. Instead, he urges investors to focuses on partnering with a financial advisor and build a diversified portfolio. The benefits of this approach are numerous, and we have spoken about them extensively in this blog. The month-over-month performance of asset classes in 2015 provides us with yet another example of such benefits.
The two charts below, provided by Deutsche Bank, outline the total return performance of some of the major global assets they track. One thing that really jumps out of these charts is the reversion in performance among the top performers. No asset class in the top quartile in January remained in the top quartile in February. In fact, six of the top January performers fell to the bottom quartile in February. Anyone that tried to hop on the bandwagon of these assets surely found the result of their decision unsatisfactory. On the flip side, four asset classes from the bottom quartile in January made their way to the top quartile in February, while only one asset class remained in the bottom quartile over both months.
Two conclusions can be drawn from asset performance so far this year. First, chasing the best past performers with the hopes of getting in on some of the action is typically met with disappointing results. Doing so leads to what is referred to as the “behavior gap” (we’ve discussed this here and here). Second, predicting which asset classes will be the top performers over any specific timeframe in the future is nearly impossible. These realities shape our recommendation to investors. Engage a financial advisor and diversify. The advisor will be your first line of defense when the volume of market noise reaches a level that could induce poor decision making. Diversification should allow you to participate in assets that are performing the best, while limit your exposure to assets that are performing the worst.