What’s the broccoli of your portfolio?
For as long as I can recall, I have heard market pundits rationalize why markets or asset classes have recently performed differently than in the past by saying “It’s different this time.” It seems that almost as soon as an asset class performs well relative to another, the victor is convincingly declared a “game changer” and favored at the expense of the other asset class. As an investor, you may find yourself lured in by the rationale and before you know it, you might be lobbying your advisor to reallocate your portfolio accordingly. But is this a reasonable course of action? Should last year’s returns drive this year’s asset allocation? I’d say no.
Think of it this way: asset classes are like different food groups. Doctors don’t always make themselves popular by reminding their patients that there are obvious health benefits to “sticking to a balanced diet.” Similarly, advisors regularly recite to investors the virtues of investing in a broad range of asset classes. Of course, doctors can’t guarantee that sticking to a balanced diet will protect against illness – in the same way that advisors can’t promise that diversifying across asset classes will protect against losses in a portfolio. Nevertheless, balance can be a sensible approach.
I’m sure I’m not alone in struggling to consistently reach for a healthy dose of vegetables and foregoing the extra cut of meat. Heck, it’s taken me 30 years to develop an affinity for broccoli. For many investors, the investing version of the “balanced diet” can be just as hard to stick to. Especially because it requires trimming your winning investments (think: desserts, steak) and stocking up on recent losers (think: broccoli, brussel sprouts) in order to regularly rebalance your portfolio to its long-term target (or “policy”) weights. The adage to “buy low and sell high” is often much easier said than done.
In today’s environment, the investing equivalent of broccoli might be Europe. For many investors, Europe is still a major source of concern – “might the debt crisis cause the financial system (or my portfolio) to collapse?” As a result, many investors are shying away from reaching for a healthy dose of European investments – and some investors are even tempted to persuade their advisor to let them sell out of their existing European holdings. But, it might be exactly the wrong time to be avoiding non-U.S. stocks that are trading at historically low valuations. There truly is no crystal ball to predict which asset class will be leading next, but history has shown that diversification may be an investor’s friend in the long run.
Consider talking to your advisor about whether your portfolio is sufficiently balanced. Who knows, you might even be treated to some French and German authenticity along the lines of “Mangez votre broccoli!”* or “Dieses Mal ist nicht anders.”*
“Mangez votre broccoli” is French for “eat your broccoli”
“Dieses Mal ist nicht anders” is German for “this time isn’t different”