Sometimes It's Okay To Lose
When It comes to investing sometimes it's okay to lose - In fact, sometimes it's the best move you can make. In the absence of a definitive way to reliably pick winners and losers, we'd argue that diversification is one of the few tools that investors have at their disposal to protect themselves from the downside risks associated with Investment Markets.
To illustrate this, I'll use a recent example. In 2017 Vanguards Emerging Market Shares ETF (VGE) delivered a total return of 20.88%. No doubt many investors sat down at the start of 2018 and marvelled at that return and thought to themselves why don't I allocate a little more of my portfolio to emerging markets this year. At the time it would have been easy to build such an argument - The previous year's returns were strong, economic expectations were for continued synchronized global economic growth and valuations in emerging markets still looked reasonable especially compared to the developed world. However, if you had made what looked like the "smart move" back at the start of the year you'd probably now be happy to finish out the year above water as VGE has only just recently eked out a positive return of 1.35% (As at July 31st) since the start of the year. Meanwhile, assets like Australian REIT'S which performed modestly in 2017 and which likely would have been the first assets to hit the chopping block in order to make room for a bigger allocation to emerging markets are on track to post an annualized return of just under 7%.
No doubt there will be years where an investor can get these kinds of calls right and overweight or even substantially over weighting a particular asset class will deliver a huge return. However more often than not the average and perhaps even the seasoned investor will get it wrong and just end up with regret and a smaller portfolio then they could and perhaps evens should have otherwise had. By diversifying your portfolio, you are essentially able to hedge your bets - Sure this means your portfolio will inevitably be exposed to some losers but in the long run it ensures you don't miss out on the winners which ultimately drive portfolio returns
Source - Vanguard
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