บทถอดความฉบับเต็มของ Diversification: always needing to say "Sorry!"

side in particular, because there are parts of the stock side in particular that are not keeping up with the best performing area of the stock, part of most people's allocation, which is US large cap stocks right now and, in particular, growth. 00:02:54.213 --> 00:03:05.677 And you know this might not be scientific, but it just seems like if, once those conversations start happening, that that's that's the wrong time to be making those decisions. 00:03:05.677 --> 00:03:13.409 It's like if you wanted to go 100% US large cap, you shouldn't be thinking about that here in June of 2024. 00:03:13.409 --> 00:03:16.842 You should have been doing it at the bottom in 2022, but no one wanted to do it at that point. 00:03:16.842 --> 00:03:27.033 No, we were talking about the commodity upcoming commodity super cycle that had begun in 2022 at that point in the fourth quarter and since then that hasn't looked great. 00:03:27.159 --> 00:03:48.967 So to your point, tim, I think Cliff Asness of AQR has called this momentum investing at value time horizons Right, meaning you're buying what has worked over a multi-year window when, in reality, if you were going to do anything, it would be the time to fade it. 00:03:48.967 --> 00:04:06.020 Or you could be a diversified investor and not need to have opinions about what to pile into and what to fade, because it renders it obsolete when you diversify and have exposure to these areas over time in constant and rebalance. 00:04:06.741 --> 00:04:30.151 I think that is probably one of the hardest parts of being an advisor is trying to wrestle away the idea that we should just do as you said a moment earlier NVIDIA and T-bills Because that will ultimately wind up well, not ultimately, but probably wind up being wrong and maybe very wrong. 00:04:31.000 --> 00:04:49.470 Yeah, I feel like sometimes, when you explain our philosophy in terms of diversification, rebalancing, owning a number of different asset classes, it depends on who you're telling it to, but sometimes you just see a look in their face being like that's it, it's too simple it's too simple, exactly yeah. 00:04:49.529 --> 00:05:02.689 So I feel like simple, but not easy because it sounds it sounds simple and the results are proven over time, but people don't like it because it involves being patient, and being patient is not fun. 00:05:02.689 --> 00:05:10.173 It's more fun and more comfortable to just look out the rear view and pile into whatever has been working most recently. 00:05:10.173 --> 00:05:15.148 That's a terrible investment strategy by all accounts, any way that you measure it over time. 00:05:15.749 --> 00:05:27.855 I somehow suspect that there's a lot of people that do that sort of weirdly trend kind of following, where they're actually watching what has worked and just do that. 00:05:29.279 --> 00:05:34.228 Yeah, I feel like the financial media has kind of. 00:05:34.228 --> 00:05:44.632 You said the word fun before, and I think investing for the longterm and fun should not be used in the same sentence. 00:05:44.632 --> 00:05:45.434 You know what I mean. 00:05:45.434 --> 00:05:47.384 Like that's not what you should describe. 00:05:47.384 --> 00:05:49.490 Investing should be super boring. 00:05:49.490 --> 00:05:52.004 You need a lot of patience, and patience isn't fun. 00:05:52.004 --> 00:05:54.971 Don't use the word fun when you're talking about investing. 00:05:54.971 --> 00:06:02.747 If you're, if you're worried about your investments being not fun enough, you're probably picking the wrong, wrong investments. 00:06:02.747 --> 00:06:04.752 I don't know. 00:06:04.752 --> 00:06:15.071 A good way to feel comfortable and to feel like you're being smart is to just chase whatever is in vogue right now. 00:06:15.071 --> 00:06:20.129 It will feel intelligent to pile into what's worked, but you don't get the results that have already happened. 00:06:20.129 --> 00:06:28.093 You get the ones going forward from now until whenever the next trend catches your eye and you're on to that shiny object. 00:06:28.961 --> 00:06:30.245 It's along the same lines. 00:06:30.245 --> 00:06:36.843 The same or similar kind of conversation happens when you wake up and say you know what? 00:06:36.843 --> 00:06:39.872 I think we should just sell everything and go to cash. 00:06:39.872 --> 00:06:47.394 Or you just want to make allocation changes because you have a feeling about the market. 00:06:47.394 --> 00:06:49.809 You may feel good in the moment. 00:06:49.809 --> 00:06:57.706 You may feel good for five days or five weeks that you did the right thing, but over a longer stretch of time. 00:06:57.706 --> 00:07:01.680 Any longer stretch of time, it's going to wind up biting you in the butt. 00:07:02.021 --> 00:07:10.665 I mean even even 12 months or one calendar year, which we don't necessarily think of as long-term. 00:07:10.665 --> 00:07:18.004 You know, things can go from the top performing asset class to the bottom or vice versa. 00:07:18.004 --> 00:07:31.250 They were the you know they were an underperformer the year before and then they were the best performing asset class the next year, and trying to figure out when that's going to happen is super hard to do. 00:07:31.812 --> 00:07:34.341 It's unnecessary to achieve in good long-term returns. 00:07:34.541 --> 00:07:35.603 You don't need to. 00:07:35.603 --> 00:07:42.220 I think that if you look, when we're talking about investing, we're talking about asset classes or styles of investing. 00:07:42.220 --> 00:07:43.947 We're not talking about individual stocks. 00:07:43.947 --> 00:08:02.516 We're talking about diversifying a portfolio, and so these areas of the market all serve a role in the portfolio and we can look at the long-term historical returns to see that they may be very similar over a multi-decade period, but they take a very different path to get there. 00:08:02.516 --> 00:08:13.444 So the part that we complain about in the short term, the variance in

those results on a year-to-year basis, is what brings value to these pieces of the portfolio as team members. 00:08:13.444 --> 00:08:20.408 Over time, they complement one another and pick up when one is ebbing, the other is flowing and vice versa. 00:08:20.408 --> 00:08:25.603 Pick up when one is ebbing, the other is flowing, and vice versa. 00:08:25.622 --> 00:08:26.745 I think that is a core tenet of diversification. 00:08:26.745 --> 00:08:32.965 But sometimes, when trends remain in place for a couple of years, I mean we have to see this day to day. 00:08:32.965 --> 00:08:36.037 I mean I don't know if every investor does. 00:08:36.037 --> 00:08:45.798 We do it for a living, so we have to look at it every single day, and living through a multi-year period where something underperforms is excruciating in real time. 00:08:45.798 --> 00:08:46.941 I'm not disputing that. 00:08:46.941 --> 00:09:03.962 But you need to hold what's happened recently alongside the historical context of what you expect and what made you invest in the first place and think on that before you do anything too rash with investment changes. 00:09:04.023 --> 00:09:15.690 I think yeah, I will also chime in and say that these asset classes can change direction pretty quickly, I mean before most people even realize it. 00:09:15.690 --> 00:09:27.086 So in 2022, we saw commodities at the top of the pile with a positive I forget 17%, something like that kind of return overall. 00:09:27.086 --> 00:09:30.633 And in 2023, it was the worst asset class to own. 00:09:32.121 --> 00:09:40.528 But yet Right, and the time that people actually went in and bought commodities was probably after it had the best year in 2022. 00:09:40.528 --> 00:09:44.750 They're not buying that at the beginning of 2022 or the end of 2021. 00:09:44.750 --> 00:09:46.759 Which is when the performance actually happens. 00:09:47.481 --> 00:09:47.964 Exactly. 00:09:48.004 --> 00:09:55.600 And the same goes for the current run in US large cap tech stocks which got absolutely decimated during the bear market of 2022. 00:09:56.201 --> 00:10:08.607 They were the worst performer hands down and they've reversed that since then and been the best over 23 and now halfway through 24 as well top of the pile to the bottom in terms of performance on a year-to-year basis. 00:10:08.607 --> 00:10:36.984 But then you also look at a time period over 20 years annualized returns of things like large, mid, small, international and emerging markets Since 2001,. 00:10:36.984 --> 00:10:43.282 They're all within a percent or two of each other, up six to eight and a half percent annually average per year. 00:10:43.282 --> 00:10:58.948 So I think if you give yourself enough time to let these things work and you own them consistently, not trying to jump in or jump out based on what's worked on a year to year basis, you get that averaged annualized return in your own portfolio. 00:10:59.590 --> 00:11:47.195 But it's hard for people to do that and that's part of what we have to do as advisors when we go through these periods of time is analyze the portfolio, look at what's working and, of course, what isn't working, and consider within the broader context of what made us make the portfolios as they are, whether broader context of what made us make the portfolios as they are, whether those laggard areas are broken or something has fundamentally changed about them that caused us to reconsider them as a viable part of the portfolio, or whether we're going through a period of time that might be comparable to a prior one that we've just forgotten now because of history, and whether this is just a normal variance that we should expect over the course of time. 00:11:47.195 --> 00:11:48.437 Of course, we don't know. 00:11:48.437 --> 00:12:01.783 We are making guesses about the future, but I think that we need to weight the historical evidence as much as the recent past even though our brain wants us to do the reverse of that as the recent past, even though our brain wants us to do the reverse of that. 00:12:01.803 --> 00:12:15.586 I think the danger part for some folks right now, as they try to project into the future, is they take too short of a period and they say, well, hey, large cap growth stocks have been returning 12, 13, 20 percent for the last couple of years. 00:12:15.586 --> 00:12:19.571 13, 20% for the last couple of years. 00:12:19.571 --> 00:12:24.796 If we just use a number of 10 or 11% into the future. 00:12:31.279 --> 00:12:32.082 I'm going to be living on easy street. 00:12:32.082 --> 00:12:32.563 It's dangerous. 00:12:32.563 --> 00:12:39.121 I think it's dangerous to do that if you're just piling in and then piling out, but it's less dangerous if you're just constantly exposed to that. 00:12:39.121 --> 00:12:45.134 Because it's not to say that US large cap has been crushing it for the last two years. 00:12:45.134 --> 00:12:48.230 Now's the time to sell all of your US large cap. 00:12:48.230 --> 00:12:58.850 Like that's not really what we're saying, it's mostly that having consistent exposure to it is more so the point of diversification is more so the point of diversification. 00:12:59.591 --> 00:13:08.647 You kind of tip over into, you know, another part of the discussion about timing. 00:13:08.647 --> 00:13:17.240 You know, is there a point where you, when you can clearly say looks to me like the run in, fill in the blank. 00:13:17.240 --> 00:13:20.510 Asset class is over, let's get out or let's. 00:13:20.510 --> 00:13:22.197 You're making a timing call. 00:13:22.558 --> 00:13:37.711 Yeah, I think it might not be necessarily based on the performance numbers, but more so, like, do we think this strategy or something about it has, like Brendan, you said before, like is it broken or does this not? 00:13:38.394 --> 00:13:40.837 It's no longer a viable strategy. 00:13:40.837 --> 00:13:49.900 Less so, you know, we don't think these returns can withstand another year or two of the

same type of thing. 00:13:49.900 --> 00:13:55.221 So it's not to say that you'll never, ever, sell out of an asset class completely. 00:13:55.221 --> 00:14:03.841 It's more so to say, like the work needs to be done on the back end, and more times than not, the answer is going to be to do nothing. 00:14:03.841 --> 00:14:07.500 But it doesn't mean that that's never, never going to happen. 00:14:07.500 --> 00:14:22.913 No, like, do the work to continue having the opinion that you should allocate to the space and, uh, and especially, do the work when all of the recent performance is suggesting that you should give up, like, like, look into it. 00:14:22.913 --> 00:14:24.802 Yeah, obviously don't ignore that. 00:14:24.802 --> 00:14:37.398 You don't want to be stubborn when it comes to allocating, but I also think that the bar should be incredibly high for giving up on an entire asset class or strategy that had enough evidence to be allocated to in the first place. 00:14:37.639 --> 00:14:42.855 Yeah, I think that's important too, if you want to go blow out of something completely. 00:14:42.855 --> 00:14:46.413 It's like maybe think back to why you bought it in the first place, like what? 00:14:46.413 --> 00:14:48.842 What was the fundamental reason behind doing that? 00:14:48.842 --> 00:14:55.280 Usually there's something to be learned, and the something is that your expectation should have been better at the onset. 00:14:55.341 --> 00:14:56.263 Maybe you were excited. 00:14:56.263 --> 00:14:58.076 You bought it for the wrong reason too. 00:14:58.309 --> 00:15:00.937 Like you just bought it because it chart goes up. 00:15:00.937 --> 00:15:01.739 You know what I mean. 00:15:01.739 --> 00:15:14.346 Yeah, yeah, I think I think you should have appropriate expectations, and sometimes the best way to have better expectations is to to experience, you know, performance. 00:15:14.346 --> 00:15:16.149 That resets those expectations. 00:15:16.149 --> 00:15:26.216 It doesn't mean you have to give up on something, but I think it is probably a good reminder that maybe more work should have been done to understand the strategy to begin with. 00:15:26.216 --> 00:15:33.798 On the way in and it's easy to buy something that's currently working because it's comfortable Everyone will tell you you're smart for allocating to it. 00:15:33.798 --> 00:15:40.269 But you should understand the strategy more than just checking those simple boxes. 00:15:40.269 --> 00:15:52.321 If that is all that made a good investor, then the list of the greats would be a lot longer than it is if it was just buy what everyone else says is good to buy right now. 00:15:52.601 --> 00:15:55.212 Right, Before we turn the microphone on. 00:15:55.212 --> 00:16:05.005 Brendan mentioned this that success is measured, from an investment perspective, in terms of decades, not days. 00:16:05.005 --> 00:16:17.013 When you look back to the chart and we'll link to this in the show notes that Morningstar put together and, tim, you referenced this just a few moments ago Since 2001,. 00:16:17.013 --> 00:16:23.024 Annualized returns by asset classes they've all had their spot at the top of the list. 00:16:23.024 --> 00:16:26.480 It doesn't matter if we're talking about small caps, mid caps, large caps. 00:16:26.480 --> 00:16:37.700 They've each had their turn, and so we don't know, from year to year, or even quarter to quarter, which classes are going to do well and which ones aren't. 00:16:37.740 --> 00:16:41.399 So you need to we meaning the royalty, not just us at this table. 00:16:41.418 --> 00:16:41.779 Correct. 00:16:42.250 --> 00:16:45.674 Everybody, no matter how smart they sound on TV or who you're speaking with. 00:16:46.376 --> 00:16:51.498 Nobody knows, and it's fine, because you don't have to know to be a good investor over the long term. 00:16:53.115 --> 00:17:02.232 That's the point of diversifying, and maybe these asset classes all end up in a similar place over the long term, but they're not going to take the same paths to get there. 00:17:02.232 --> 00:17:22.695 So if you don't want to have to time these decisions which I think is wise because nobody can do so repeatedly over time and in a way that's additive to performance then you can find a balance of them that you're cool with and rest assured that you're always going to have the top performer, but you're probably always going to have the bottom performer too. 00:17:22.695 --> 00:17:30.932 Since you've diversified, I feel like we dunk on financial TV a lot but, like in this case, it's worth repeating that like they're not. 00:17:30.932 --> 00:17:45.513 They're speaking to you, but it doesn't necessarily mean that you should listen to them, because they're not going to be invited back on tv if they say don't sell your small caps to buy all nvidia no, I mean like they're giving us all what we want, and what we ask for and they're continue. 00:17:45.734 --> 00:17:47.298 They continue to have a spot. 00:17:47.298 --> 00:17:51.374 Yeah, and the uh money that comes with selling advertisements on their channel. 00:17:51.374 --> 00:17:56.266 Because we all watch, we can't look away like it's exciting, we tune in, they're giving us what we want. 00:17:56.266 --> 00:17:57.729 It's not because they're bad people. 00:17:57.729 --> 00:17:58.673 They're doing their job. 00:17:58.692 --> 00:18:14.740 They're there to entertain us and but, like I said, keep watching, like I said before man like entertainment, fun, exciting like those aren't words that you should associate with with a long-term investment portfolio, in my opinion totally, totally Separate the two. 00:18:14.740 --> 00:18:19.172 I don't think it's fair to use them as a scapegoat, and say like I would have, it's their fault. 00:18:19.172 --> 00:18:20.096 This happened to me. 00:18:20.096 --> 00:18:25.461 Yeah, it takes some personal responsibility or work with somebody who does to be able to cut through that. 00:18:25.461 --> 00:18:27.798 I don't think these are bad people and it's not their fault. 00:18:28.510 --> 00:18:28.971 Of course, yeah. 00:18:28.971 --> 00:18:33.642 Yeah, it's not their fault if you or your advisor is very poor at timing the market Right. 00:18:34.163 --> 00:18:42.623 So I guess if we were to throw a blanket over this entire discussion, it would be that phrase that we've all learned about diversification. 00:18:42.623 --> 00:18:47.994 Diversification means always having to say I'm sorry about something. 00:18:47.994 --> 00:18:50.201 Not exactly working. 00:18:51.029 --> 00:18:52.212 Yeah, in 2022, it was. 00:18:52.212 --> 00:18:55.761 I'm sorry I had US large cap tech stocks and since then it's been. 00:18:55.761 --> 00:19:00.442 I'm glad I did, but I'm sorry I had bonds or I'm sorry I had small caps and yeah, that's. 00:19:00.442 --> 00:19:02.534 That's part of being diversified. 00:19:03.477 --> 00:19:05.520 I think that's a good spot to end things. 00:19:05.520 --> 00:19:07.371 Thanks again for listening to the podcast. 00:19:07.371 --> 00:19:09.653 This was episode 479. 00:19:09.854 --> 00:19:14.198 Tom Malooly is an investment advisor representative with Malooly Asset Management. 00:19:14.198 --> 00:19:23.727 All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Malooly Asset Management. 00:19:23.727 --> 00:19:31.064 This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. 00:19:31.064 --> 00:19:37.971 Clients of Malooly Asset Management may maintain positions and securities discussed in this podcast. 00:19:37.971 --> 00:20:00.252 Thank you.