A lesson for investors on Pi(e) Day
March 14th (3.14) is National Pi (π) Day. I like both pi and pie, and I think there’s a corollary to investing for both.
As you may remember from junior high math class, pi is the ratio of the circumference of a circle to its diameter. It is an irrational number which means its decimal expansion has no ending or repetition. Since Archimedes, mathematicians have tried to solve the puzzle of pi, how to calculate the exact ratio of a circle’s circumference to its diameter. Yet, no matter how hard anyone tries, the best we have are better and better approximations.
We humans have long endeavored to find order and patterns in things, investing included. And we’re constantly reminded that we can’t know with certainty which asset class will be the next to be the top performer. Investors in the markets in 2008 saw bonds on top. However, those investors who tried to structure their portfolios based on a repeat of that performance were sorely disappointed when bonds were at the bottom in 2009 and into 20101 (More information about how different asset classes have performed over the past 15 years can be found in this client-ready PDF).
Here’s where pie comes in… and no, not of the edible fruit variety
I’m referring to the pie chart, in this case one of a portfolio of asset classes (equities, fixed income, and real assets). It is precisely because of the fact that we don’t know with absolute conviction which asset class will outperform all the other asset classes that we create portfolio pies – with different asset class slices – so that we can withstand all that the markets may throw at us. By having a portfolio made up of different slices, investors don’t have to solve the puzzle of deciding which asset class will be the top performer, they’re covered because they’re well represented.
So what does this mean for your clients? Keep reminding them of the value of diversification – that a portfolio pie thoughtfully made up of many asset class slices may be the smoothest way to help them meet their financial goals. Pi is a reminder that we can’t find order in everything, investing included. So, with Pi(e) day fast approaching, now might be a good time to start baking some fruit pies and reminding your clients about the value of diversification.
1 “Value of diversification“, Russell Investments, January 2011