Homo economicus likes to imagine himself as a clever being. And in some respects, he’s right. But when it comes to investing, even the most intelligent minds in the universe can be hornswoggled. Mr. Market, someone once told us, is a tricky nemesis.
With a new year standing before us, and an old one behind, this is the traditional moment to reassess, review and make a guess at what’s coming next. That includes deciding how to tweak the portfolio, if at all. The challenge, for our money, is now and forever at the center of success, or failure. Strategy, in other words, trumps all, even though the outcome may not be obvious for years or even decades. Nonetheless, the choices we make today, tomorrow, next year and beyond for building a portfolio–overweighting this, underweighting that–ultimately dictate results, for good or ill.
On that subject we’re routinely impressed by how difficult it is to reengineer betas to suit our investment needs and claim victory. Indeed, a popular if not universal goal is reducing risk while maintaining return. No easy trick, although it’s tempting to think that any one can do it. The proliferation of ETFs, to take an obvious example, provides a broad and ever-expanding palette of betas to play with. Surely an intelligent strategist can choose a mix of betas, from stocks to bonds to commodities and beyond, and craft a winning portfolio that delivers superior risk-adjusted returns.
While such a goal isn’t impossible, it’s devilishly difficult to achieve for the long run. Ironically, most investors probably have no clue just how difficult the task. Why? Because one can only recognize the depth of the challenge by routinely analyzing a living, breathing portfolio over the course of time. Daily analysis is ideal, although weekly or even monthly data will suffice over long periods. In any case, unless you’re crunching the numbers regularly, and comparing your results to a benchmark, it’s easy to overlook just how elusive successful investment strategy can be.