When dining out with friends and family, I make it a rule to order something different from my fellow diners. The smaller the group and the more similar the orders, the higher the risk of us getting the same unexpectedly bad dish.
This is not an issue at tried-and-tested haunts like my usual café for a standard sandwich or the pub for a Sunday roast. But just take my recent holiday in Lisbon: triple-ordering an octopus salad that turned out to be less than fresh would have been a risk that was just not worth taking.
So diversification is the strategy I have used – over many dining experiences – to ensure that we end up getting mostly nice and tasty dishes. More importantly, if one order misses the mark, the whole experience is not ruined for everyone at the table.
When it comes to multi-asset portfolios, investors need to take exactly the same approach. Patience and diversification are key ingredients of success for investors. Nowadays, a wider range of investment choices means the menu options for diversifying assets is long and interesting. The final two concepts in the investing principles series are on staying invested and diversified. Do not put your emotions in charge of your investments.
Trying to time the market can be a dangerous habit. Pullbacks are hard to predict and strong returns often follow the worst returns. But many investors think they can outsmart the market – or they let emotions like fear and greed push them into investment decisions they later regret.
Even missing a handful of days in the market can have a devastating effect on an investor’s total returns. In fact, as this week’s chart shows, just missing the 50 best days of FTSE All-Share performance over the past 20 years would have lost investors money, which – along with the lost compounding of returns on those days – is devastating to a portfolio.
While markets can always have a bad day, week, month or even a bad year, history suggests investors are much less likely to suffer losses over longer periods. In other words, it pays to keep a long-term perspective. Investors should not necessarily expect the same rates of return in the future as we have seen in the past. But a diversified blend of stocks and bonds has not suffered a negative return over any 10-year rolling period in the past 66 years, despite the great swings in annual returns that we have seen since 1950.
The last 10 years have been a volatile and tumultuous ride for investors, beset by natural disasters, geopolitical conflicts and a major financial crisis. Yet despite these difficulties, the worst-performing of the main asset classes have been cash and commodities.
Conversely, a well-diversified portfolio, including stocks, bonds and some other asset classes, has returned above 8 per cent per year over this time period. In some years, emerging market equities do very well; in other years, it is high-yield bonds or developed market equities. Different factors affect each asset class in different ways, and some are entirely out of investors’ control and beyond their power to predict. The diversified portfolio has also provided a much smoother ride for investors than investing in equities alone.
Over the years of dining out, I have accepted there will be some dishes that just do not work. It is okay if one of my friends took a chance and ordered the ox tongue in miso cherry béarnaise and it did not work, because someone else at the table got a gorgeous steak frites and there is always the option to reach across and grab a bite. After all, isn’t that what true friendship – or a well-diversified multi-asset portfolio – is all about?
Nandini Ramakrishnan is global market strategist of JP Morgan Asset Management
