Rob Arnott, who is the Chairman and Founder of Research Affiliates LLC, gave a great interview with MoneyWatch.com in which he discusses three common precepts about investing and explains how they are misused.
1. Stocks may not be for the long run afterall
2. Taking on more risk to get higher returns is not how it works
3. Diversification fails temporarily, but doesn’t mean you should give up on it
I’ve been a big fan of Arnott’s work for some time now and I enjoyed this video. I think it is well worth the five minute running time. If you are reading this via facebook or email, don’t forget to visit the website to see the video.
Interesting video, thanks Preet. Rob Arnott was speaking of sector diversification, but my concern is country diversification. I was just looking at some numbers to get the benefits of diversification clear, and it seems that as of March 2009, the annual percent return over the last decade for the S&P was 4.7%, the World Index return was -3.5% and the TSX was 2.8%. My Mum’s Canadian dividend stock portfolio has paid her close to 9% per year over the last decade. I worry that as I am now retired, the global portion of my portfolio will be a drag on my total return.
Lots of interesting points – of course the right question isn’t whether long government bonds (30 year bonds?) outperformed stocks over the last 40 years but whether that was a reasonable guess 40 years ago :) Maybe the additional risk of holding a long bond is rewarded, but I’m still not sure I would be interested in them unless the rates were over 10% (and even then inflation would probably make them less valuable)
@Susan – I’m afraid that the only thing I can say is that the future is hard to predict. However, many studies have shown that a large portion of returns domestically have come from dividends (and presumably re-investing those dividends). Domestic companies for now, are paying a higher yield than emerging stocks, so keeping a higher than market allocation domestically is agreeable with me for those reasons as well as currency reasons and psychological reasons. Of course it is also possible that you miss out on higher growth by not being exposed more internationally. Many people have only have Canadian exposure, and many people use 1/3 to Canada, US and International. I suggest doing more research until you are comfortable with your decision – good luck!
@ Silicon Prairie – If I’m not mistaken, the primary investors in long bonds are pension plans – retail investors don’t seem to have large exposures to this asset class. (liability matching reasons). They worked really well because since they were long term, the duration was high (sensitivity to interest rate changes) and we’ve been in a long term declining interest rate environment. Seeing as we are more likely in a increasing interest rate environment, long bonds don’t seem attractive to me….
Ah, that makes sense – it’s a bit of a one-way bet. Unless you short some long bonds now and follow them back the other direction :)