At Truepoint, we recognize the folly of making short-term predictions related to the financial markets; we do, however, offer other predictions. Below are four things we predict you will hear at an upcoming holiday gathering or New Year’s party:
- At least three bad jokes referencing Tiger Woods.
- Why the healthcare bill represents positive change of historic proportions.
- Why the healthcare bill is a colossal legislative mistake.
- And finally, how a friend or acquaintance made a killing in the stock market this year by investing in emerging markets such as Brazil, India and/or China.
While the subjects change from year to year, we are all too familiar with the last topic. It often takes the form of an off-hand comment from a seemingly shrewd investor. However, researchers have found that these boasts are frequently a product of “mental accounting.” This behavioral finance term describes the common tendency of investors to focus solely on their successful investments while failing to recall those that may have performed poorly.
Understandably, hearing about this “great” performance from others may lead you to wonder whether your portfolio is also benefiting from these tremendous returns. In an attempt to save our clients from a night of tossing and turning, we thought it might be helpful to revisit the exposure to emerging markets in Truepoint-managed portfolios.
As first discussed in an August Truepoint Investor commentary, many investors took note of the extraordinary performance of emerging markets and subsequently established a position (exhibiting the classic investor behavior of chasing past returns). In contrast, the highly diversified nature of the portfolios we manage provides consistent exposure to markets all over the world, including the emerging markets. Consequently, our clients have fully participated in the nearly 80% return generated by the emerging markets position over the past year. While we’d love to credit this to our unusual level of foresight, it is simply a result of maintaining a properly diversified global portfolio.
The highly volatile performance of the emerging markets serves as a prime example of the importance of developing an appropriate portfolio allocation and adhering to it. The inherent challenge of this approach is feeling comfortable as a marginal buyer throughout a downturn and as a marginal seller throughout a rally. However, it is exactly this process through which our clients have capitalized on the performance of the emerging markets asset class.
While this disciplined and academically proven portfolio strategy does not make for very exciting cocktail conversation, it is our sincere hope that it does allow our clients to relax and enjoy their holiday gatherings free from any portfolio-related anxiety.