Smooth road

Content provided by Kostya Etus, CLS Portfolio Manager

At CLS, our focus on global markets and balanced portfolios has faced tough headwinds over the past year. But does that mean we should abandon ship? If we tossed our investment plans overboard every time the waters got rough (to stretch a metaphor here), we would be chasing performance. And if there’s one thing we know, basing investment decisions on performance-chasing instead of time-tested investment philosophies is the surest way to tank returns.

Global, balanced portfolios can provide a smoother ride for investors over time and a better, long-term experience. Here’s why:

A Global View

Historically, globally diversified portfolios have earned superior risk-adjusted returns, but recent underperformance has made investors wary. The inherent benefits of international diversification, however, have not changed. In fact, the argument for global investing is growing stronger.

While the U.S. still makes up the majority of the global market, international markets have grown over time and now account for nearly 47% of the total world market. Many countries are growing faster than the U.S., making them attractive places for investment allocation. Technological advances along with structural reforms have also opened up new investable markets and driven progress in many developing countries.

Checks and Balances

Diversification is the main benefit of balanced portfolios. Combining asset classes with low correlations tends to produce portfolios with lower volatilities. Portfolios with lower volatility (risk) typically lead to steady returns and eliminate short-term market noise.

One of the more overlooked benefits of diversification is that it saves investors from themselves. The natural human tendency is to buy winners and sell losers. This typically leads to buying at peaks and selling at troughs. Sticking to a balanced portfolio avoids some of these dangerous human behaviors, such as abandoning a long-term investment philosophy based on one-year returns.

The Threat of Us

To evaluate and quantify the human nature effect, we compared Morningstar’s investor return data, which compares the average investor’s returns in a fund over a period of time, to the total return for all U.S. mutual funds (over 20,000 funds with one-year performance and almost 13,000 funds with five-year performance). The results were fairly consistent across time periods. The investor return underperformed the total return by about 1%. That difference is known as the behavior gap, i.e., the cost associated with human behavior. Interestingly, the behavior gap was fairly consistent across all Morningstar categories. Thus it’s clear that no matter what people are investing in, they need to be saved from themselves.

Here at CLS, we’re not about chasing performance. And we’ll stick to what we believe works –  global, balanced portfolios.

Behavior Gap

The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such.  All opinions expressed herein are subject to change without notice.  This information is prepared for general information only.  It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report.  You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.  You should note that security values may fluctuate and that each security’s price or value may rise or fall.  Accordingly, investors may receive back less than originally invested.  Past performance is not a guide to future performance.  Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk.  These risks are in addition to any unsystematic risks associated with particular investment styles or strategies. 1125-CLS-2/9/2016