Friday, December 21st, 2012

Don’t be an Investment Foodie

Christmas is a time for overeating: too much rich food, often accompanied by too much alcohol. You can learn a lot about people just by standing next to a party buffet. Some pile their plates with anything and everything on offer. They leave with incongruous combinations of fish and cheese, and umpteen different types of salad. Others are more selective. They choose only what they eat for the rest of year. The parallels between food and investing are endless and varied. Both are a function of basic human needs and a clear indicator of character.

Come January, the healthy living columns of every newspaper will be full of articles recommending a balanced diet, while the investment columns will sing the praises of a diversified portfolio. Diversification is a vexed topic for the investment industry. Of course investors need meat and potatoes and green veg, but they probably do not need beef and pork and chicken, and mash and chips and roesti on the same plate at the same time. The art of eating well is the ability to choose the right food for the right season, and to make sure that the chef can cook it.

The art of investing is not much different. A fixed allocation between bond and equities which hardly changes through the cycle is not an appetizing proposition, even if it covers a wide range of countries. Over the long term it tends to generate the same risk-adjusted returns as each of its underlying constituents and in 2008 it would have given you severe heartburn. Alternative asset classes are not necessarily the answer either. Adding expensive spices to the beef, or herbs to the chicken, won’t make the pork taste any better.

So in the New Year, when the scales say it’s time to lose some weight, don’t carry on with the same portfolio mix. What you leave off your plate is just as important as what you put on it. Diversification is a state of mind. It’s about choosing the right investments for the right stage of the cycle. When the season changes, change the menu. Who eats Christmas pudding in July?

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