Not Every Holding Should Go Up
By Roger Nusbaum, AdvisorShares ETF Strategist
In a recent post, Abnormal Returns included a link to this Bloomberg article about the odyssey of an inverse treasury ETF which has continually gone down in value while still attracting assets. Obviously an inverse treasury ETF appeals to a strategy that wants to protect against rising rates but it turns out that rates haven’t gone up since the fund came out…yet people still buy it.
I think this ties into a bigger point related to portfolio construction in general and having or setting expectations for what the portfolio should do or will hopefully actually accomplish. The actual objective of most portfolios, even if the end user doesn’t realize it (yet) is simply to have enough money when that money is actually needed which for most people is retirement.
Long term financial plan success will be more dependent on savings rates and spending habits than investment success. If an investor beats the market every year but only saves $2000 year then they are likely to come up short. The investor who usually lags the market but stays reasonably close and has a savings rate of 20-25% is very likely to have enough when they need it. I would argue that the most important aspect of performance is avoiding doing something stupid (read emotional) at the worst possible time like someone who was 60 years old in 2009, panic sold in the first quarter and has watched the market triple since then.
Avoiding succumbing to emotion then is about smoothing out the ride and understanding that true diversification means that not every holding should go up along with a raging bull market. The easy example of this is gold which takes a beating, sentiment wise, for being negative for however many years as the S&P 500 has rocketed higher. Many people who own gold do so because it tends to not look like the domestic equity market and despite all the noise that continues to be the case.
A recent post looked at myopic loss aversion which is acting out based on short term emotion at the expense of long term wellbeing. It can’t be stressed enough that the short term does not matter for most post people. At 65 or 70 or some other desired retirement age an investor either has enough or they don’t. Lagging by 5% one year for having too much small cap or lagging by 6% another year for not enough emerging market exposure is not a difference maker to having enough money when it is needed.
Difference makers will be the types of things mentioned above like savings rates and panicking. Alternatives, whether that means inverse treasury funds or the myriad of many other products designed to smooth out the ride help prevent panics even if they do drag returns slightly when the event being protected against isn’t currently playing out.
A financial plan will not be done in by small drags on returns or a little too much of one thing or not quite enough of something else. The bigger threats are emotions, extremely risky behavior like putting a quarter of a portfolio into a lottery ticket biotech, poor savings habits and unrealistic spending habits.