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Mistakes.


Does this sound like your investment portfolio?

2nd most yards rushing, 2nd most 1st downs by rushing and 2nd most in average yards rushing per game. 2nd fewest yards of offense allowed and most quarterback sacks … in the league.

Yet,

A season record of 4-14 and 0-9 on the road. Lost 9 games by 4 points or less and lost 10 games by a touchdown or less. And didn’t make the playoffs.

Why?

Mistakes.

The individual players (investments) were, at times, brilliant yet, together, the team (portfolio) still failed to meet the objective.

The 2010  Winnipeg Blue Bombers were good individually. But the team was the 3rd most penalized in the CFL in 2010. (Montreal and B.C. had only 3 more). And the penalties were at the most critical times … evidenced by the league leading ‘most times punted’ stat.

Individual Investors get penalized for their mistakes too.

Today, investors are repeating the biggest investment mistake of all – ignoring asset allocation. Betting it all on bonds/stocks at the expense of stocks/bonds has always proven costly.

Bond and Stock fund flows

Richard Marston from the Wharton business school notes that “large institutions, such as endowments and pension plans, are still maintaining a diversified portfolio of domestic stocks, foreign stocks and fixed income investments. In contrast, many Individual Investors have pulled out of stocks entirely.” [Institutions maintain about 1/3rd bonds, ½ stocks with some real estate (REITs) and cash].

The equity out flows during 2008, after the fact, and just before the market recovery, is a buy high and sell low strategy. Big mistake. The bond inflows today, at the expense of stocks are compounding the previous mistake.

In ‘The Elements of Investing’, Charlie Ellis writes that one of the major reasons for Warren Buffett’s success is that he has managed to avoid major mistakes that have crushed so many portfolios (like the Tech wreck of 1999-2000).

Big mistakes wouldn’t happen if Individual Investors, like Institutions, had a target asset allocation … say, 60/40 … suitable for all markets, good and bad.

Assset allocation with a rebalancing strategy, that brings the portfolio back to 60/40 during market disloction, is a much lower risk strategy than betting on a single asset class.

Balanced fund returns 1963-2009

Sometimes bonds/stocks work better that stocks/bonds. It’s the zig of stocks/bonds and zag bonds/stocks that make a portfolio work. Individual investors need both. Add in some REITs and voila’ … Balance. A Balanced portfolio wins.

Next time?

Good, Free Advice.

Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan

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