Does It Make My Portfolio Better?
By Roger Nusbaum, AdvisorShares ETF Strategist
Cliff Asness posted a commentary a few days ago that includes the following:
One of the most basic lessons of investing is to think about how each investment impacts your overall portfolio not just its characteristics stand‑alone. You don’t evaluate your other investment options based on, “Would I trade my whole portfolio for this?” but rather on, “Does it make my portfolio better?”
It is a great quote because it prompts investors to think about their portfolio in its entirety which I believe is the correct way to think about it especially in terms of maintaining diversification at times when that is a difficult thing to do.
Last year was just such a year when broad based, domestic indexing was far ahead of anything else and people were throwing in the towel somewhat on maintaining diversified portfolios. An important point we’ve made here repeatedly is how much diversification do you really have if everything you own goes up together.
The other day I was looking at a couple of ETF model portfolios. Quick sidebar; all ETF portfolios are being adopted by an ever growing audience ranging from financial professionals to robo-advisors to do it yourselfers and there are now quite a few firms set up that offer managed portfolios as a sort of outsourced portfolio management. The models that I was looking at were designed to cover all ground as far as being a complete solution for the duration of a stock market cycle.
While there is no way to know whether those models or any others will do what they are supposed to when it is most needed, they are doing what they are supposed to now while the market is still in the bull phase; the equities generally capture the equity market (sometimes a little better sometimes a little worse), the bonds capture the bond market (sometimes a little better sometimes a little worse) and the little bit of exposure to things that aren’t supposed to look like the stock market (so here I mean alternatives/diversifiers) don’t look like the stock market.
I’ve long believed in a mix of stocks, bonds and alternatives and continue to do so as a means of managing the entire cycle. I think Asness’ quote reminds us that some holdings are there to help the overall portfolio maybe by helping manage volatility.
Within a portfolio some holding must be the best performer. In a bull market for equities you would hope it would be one of your equity holdings; a fund or individual stock. I am one who believes in maintaining a small exposure to gold with the caveat that if gold is the best performer in the portfolio then chances are things aren’t going very well elsewhere. But occasionally things aren’t going well elsewhere and gold is your best performer or some other type of diversifier is your best performer.
Yes it can be difficult to remember why you own some asset class while it is out of favor but of course every asset class rotates from out of favor or maybe simply underperforming whatever this year’s hot dot is, to back in favor and out again. For investors who don’t want to guess when some asset class or strategy will or won’t be the top performer then they probably should maintain exposure throughout the entire cycle.