Knowing What We Don't Know
You may have heard it said that you don’t know what you don’t know. It’s certainly not a ground-breaking concept, but it is nevertheless an important one to remember – especially when it comes to investing. Allow me to illustrate the point with the following chart:
While the chart has a lot to tell us, one of the things that stands out to me every time I look at it is how inconsistent returns are across asset classes. There’s no one obvious winner. Last year, of the asset classes shown emerging markets returned the most, while this year they have performed the worst. There are reasons for this: political and economic upheaval, trade tensions, and slowing overall global growth. We want to be mindful of those reasons and diligent about paying attention to the surrounding context of whatever we invest in, but we also must acknowledge that we don’t know what we don’t know. We don’t know who will be elected or rise to power down the road, we don’t know how markets will react to certain policies, and we don’t know what types of natural disaster might occur. How then do we respond to this uncertainty?
The second thing that I hope stands out from the chart is the line snaking through the “asset allocation” portfolio. These white boxes represent a portfolio comprised of the various asset classes and what we see is that by owning a variety of assets, we may not hit the jackpot but we also don’t find ourselves scraping the bottom of the barrel. Instead, we weave a path through the middle of the return spectrum with less volatility and a bit more consistency. In the investing world, we call this diversifying and it’s a key element of a well-balanced portfolio. When it comes to the ideal allocation for your portfolio, the best approach comes down to you: your financial situation, your financial goals, and your emotional and mental ability to tolerate risk. If you’d like help answering some of those questions and figuring out a portfolio that works well for you, we’d love to help – just shoot us a message from our contact page.
*this article first appeared on A Gal's Guide to Money on November 14, 2018