You Should Hate Some of Your Investments

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is.” – Warren Buffett

“If it makes me feel like I want to throw up, I can be pretty sure it’s a great investment.” – Brian Posner

I hate some of the investments in my portfolio right now. Emerging market stocks have been huge relative underperformers this year. All of my large cap, mid cap and small cap US stocks are blowing the international markets out of the water and it’s not even close.

US stocks have been on an absolute tear this year. The S&P 500 is up almost 20%. The S&P 600 Small Cap Index is up almost 23% while the S&P 400 Mid Cap Index is up over 20%.

All this is happening while other stock markets around the globe are having relatively bad years. The MSCI EAFE (developed international stocks) is up only 7% (this would be a decent return most years) while the MSCI Emerging Markets Index is actually down almost -10%.

YOU HAVE TO HATE TO BE DIVERSIFIED
To be broadly diversified, there will almost always be some investments that you hate at any moment.

It’s impossible to pick an entire portfolio of winning investments over every time frame. Diversification actually forces you to hold just enough investments, markets and asset classes that you’re bound to hate a few of them at any point in time.

I would probably feel like a genius if I had all of my stocks in US companies this year. But I would have felt like an idiot in other time frames. Here are the 5 year return figures for US, international and emerging market stocks at different points in time over the past few years:

International and emerging market stocks handily outperformed US stocks at the 5 years marks in 2010 and 2007. Investors hated US stocks at those times just like they hate emerging markets now.

REBALANCING
The reason I’m OK with this is because the wide dispersion in performance between US stocks and EM stocks has allowed me to periodically rebalance by selling some of my US stocks to buy some more emerging market and other international stocks.

Certain international markets have their issues, but markets don’t get cheap because the news is good.  They sell off when there are problems.

It doesn’t feel like the right thing to do, but buying low and selling high is the right move to make as a long-term investor. Investing can be simple, but it’s never easy. Here’s Howard Marks on this topic:

“I keep going back to what Charlie Munger said to me, which is none of this is easy, and anybody who thinks it is easy is stupid. It is just not easy. There are many layers to this, and you just have to think well.”

My timing might not be perfect on my rebalancing, but timing the market is not the point. You’ll never get a surefire signal that now is the time to switch from one market to the next. That’s why is makes sense to spread your bets.

You are bound to hate something every year but that also means that you will probably love something every year too. Investors loved bonds in 2008 when stocks were getting crushed.

This year it’s the opposite as bonds have underperformed and stocks have outperformed. I’m not good at predicting the future, but I’m pretty sure there’s going to be a time when you’ll hate US stocks again and love something else in your portfolio. So it goes.

Don’t feel bad if you have some animosity towards some of your investments. It can actually be a good thing. It gives you something to invest in.

What you invest in doesn’t matter nearly as much as what price you paid for that investment. Here’s Ken Kurson from Equire with a simple take on the relationship between price and value:

“All investing is price versus value. Yesterday’s price and value count for zero.”

Disclaimer: Remember, you have to invest based on your own risk profile and time horizon, so don’t take this information as advice to make an investment. It’s your money so you have to invest it accordingly based on your circumstances.

Sources:
MSCI
Yahoo! Finance

Further Reading:
Attention Emerging Markets Stock Fund Shoppers (Morningstar)

On to the best stuff I’ve been reading this week:

  • “I was in the pool!” Constanza on investing and shrinkage (CBS Moneywatch)
  • Everybody investor loves a good story (WaPo)
  • Investment advice for young investors (Above the Market) and also read Young investors: don’t fear the bear (Forbes)
  • Follow your goals, not the herd (Index Universe)
  • A dozen things I’ve learned about investing from Howard Marks (25iq)
  • Do you need a financial adviser? Maybe, maybe not (US News)
  • A look inside Vanguard’s International Bond Funds (Oblivious Investor)
  • Now you’re buying stocks? (Motley Fool)
  • Some investing stories sound good until you analyze them (NY Times)
  • Test your mutual fund IQ (US News)
  • The 24 most Irish things ever (Buzzfeed)
  • Is the McDouble the most bountiful food in history? It is for me (Freakonomics)
  • Cash is a risky investment (US News)

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