When the markets get volatile many strategies will start performing poorly. Even your most basic diversified low fee indexing strategy will start to look weak even though it likely beats most professional fund managers. And when these strategies start to weaken many investors will start getting impatient. You probably know that nothing works 100% of the time, but that still doesn’t stop the allure of the green grass elsewhere.
I know, the gold strategy looks so good in the short-run. That fancy hedge fund strategy has outperformed since the S&P 500 peaked. That short only fund looks really smart now. But the problem is that most of these fancy sounding strategies are charging you high fees to underperform 80% of the time. And unfortunately, they lure in most of their assets during that 20% of the time when the markets look weak.
But here’s the thing – there are no holy grails. Nothing works all the time. If you don’t hate something in your portfolio most of the time then it probably means you’re not diversified. But be careful about the difference between being diversified and being diworsified. Diversification is best done when it’s simple, low fee and tax efficient. Diworsification occurs when you’re just layering on expensive and tax inefficient strategies that provide far less benefit over the course of an entire market cycle than you think.
And most importantly, find a good strategy and stick with it. You’ll be better off in the long-run if you find a diversified, inexpensive, tax efficient and systematic investing process as opposed to constantly flipping in and out of strategies and searching for that holy grail that doesn’t exist.