One of my favorite television shows that I take in after work is “The Profit” on CNBC.
Marcus Lemonis is a successful entrepreneur who invests in struggling businesses to help turn them around. He usually takes a majority stake so that he can exercise full control of the business and push forward the necessary measures for the turnaround to occur. Sometimes these measures are quite drastic, making the current owners extremely uncomfortable and unable to see the long-term benefit of what Marcus is trying to implement. Marcus would always tell the current owners to “trust the process,” his proven long-term method that has helped numerous small businesses turn their operations around time and time again. The trust is extremely important as it requires a lot of patience and discipline during a time of major change when it is hard to see the light at the end of the tunnel. Many of the business owners work with Marcus through this turbulent period and reap the long-term benefits of a successful turnaround. Others will not have the patience to wait things out, and will revert to their old way of doing things that has proven unsuccessful in the past.
Maintaining a consistent asset allocation when investing is also a process that has been proven to work long-term. However, it takes a lot of patience and discipline to do this. In the world of “The Profit,” patience by the company owners only needs to be maintained over a few weeks (or a single episode from the viewer’s perspective) before the benefits of the process are realized. The world of investing is not as kind as it often takes several years before investors can see the benefit of a consistent allocation.
Investors are used to comparing their annual portfolio performance to popular benchmarks like the Dow and the S&P 500 that are mainly made up of US stocks. However, we periodically get multi-year periods when most asset classes sharply underperform US stocks and thus these benchmarks. Periods of divergence like this make it difficult to trust the process and to stick with a well-allocated portfolio. Like the business owners Marcus works with, many investors will lose patience with poor performing asset classes and move money into what has been working.
The tech bubble and subsequent bust is the last time we saw such significant divergence in asset class performance. US growth and technology stocks were showing stellar performance in the late 90s, while most other asset classes were less impressive and many were in the red. Most investors gave up on asset allocation and moved much of their portfolio to US growth stocks and to technology stocks to keep up with the benchmarks. When 2000-2002 came around, US technology stocks crashed as did most investor’s portfolios that were heavily concentrated in this space. However, many of the asset classes that disappointed investors in the late 1990s held their own or even shined during the tech bust. Trusting the asset allocation process and sticking with a balanced allocation would have produced the best results when all the dust settled.
Fast forward to today. We have experienced very robust performance from US stocks over the last few years and poor performance from many other asset classes during this time. This has put a portfolio diversified amongst several asset classes well behind the popular benchmarks. However, like Marcus’ proven process of turning companies around time and time again, the success of the asset allocation process has been proven over several decades. Change is the only guarantee in the investment world. The asset classes we love today may be hated tomorrow and vice versa. This is why asset allocation works.
Investors with the patience and the discipline to stick with their allocation long-term will be rewarded for trusting the process.
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Asset Allocation does not ensure a profit or protect against loss.
No strategy assures success or protects against loss. Stock investing involves risk including loss of principal.
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