Eric Crittenden, expert in all weather investing, discusses the case for an all weather strategy, challenges of looking different from the market, international diversification, leverage, and the characteristics of a good back test.
A good all-weather portfolio should include assets and strategies that provide diversification and growth even during difficult market conditions.
Investors often favor traditional investments like stocks and bonds over true diversifiers, indicating a disconnect between their perception and actual investment choices.
Emphasizing the long-term benefits and the importance of surviving tough market conditions is essential to maintain a successful all-weather approach.
Deep dives
The importance of all-weather investing
A good all-weather portfolio is one that is prepared for various market conditions and can maintain growth even during difficult periods. It should include assets and strategies that fill in potential potholes and provide diversification across multiple asset classes. All-weather investing is crucial to navigate different market environments, such as rising interest rates, inflation, or volatile periods like the COVID-19 pandemic.
The blind taste test study
Eric Crittenden conducted a study where he anonymized different asset classes and presented them to investors. He asked them to create a portfolio based solely on the data without knowing the actual assets. Surprisingly, investors unknowingly built portfolios that resembled a durable all-weather strategy. This suggests a disconnect between investors' perception and their actual investment choices, often favoring traditional investments like stocks and bonds over true diversifiers.
The challenge of sticking to an all-weather portfolio
The challenge lies in investors' emotional reactions and short-term perspectives. Investors are often swayed by short-term performance and tend to abandon true diversification during market downturns. This behavior is driven by envy and the desire to chase high returns, leading to poor decision-making and a lack of commitment to an all-weather portfolio. It is essential to emphasize the long-term benefits and the importance of surviving tough market conditions in order to maintain a successful all-weather approach.
The benefits of including international assets
Many investors tend to have a US-centric bias in their portfolios. However, including international assets can offer valuable diversification and exposure to different trends and risk premiums. The global GDP is largely driven by regions outside of the US, making international assets an important part of a comprehensive all-weather strategy. While investing in international markets may involve additional considerations like currency conversions, the potential for greater diversification and risk-adjusted returns can make it worthwhile.
The significance of realistic expectations in investing
Realistic expectations are crucial for investors to avoid chasing unrealistic returns or getting caught up in sensationalized strategies. Looking at historical data, it becomes evident that achieving high sharp ratios or double-digit returns consistently is extremely challenging. Having an honest view of reality and understanding the limitations of investing helps investors stay focused on building a solid, long-term all-weather portfolio. It's important to embrace a disciplined and patient approach rather than being swayed by short-term performance or unrealistic promises.
In this episode, we talk all weather investing with Standpoint's Eric Crittenden. We discuss the case for an all weather strategy relative to a stock and bond portfolio, the challenges of looking different than the market, portfolio construction, international diversification, leverage, the characteristics of a good back test and a lot more.
We hope you enjoy the discussion.
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