- During the tech mania of the late 1990s, many investors abandoned the principles of sound diversification and over-weighted their portfolios with technology stocks.
- Ten years ago, investors began skewing their portfolios to banks and other beneficiaries of the real estate boom and in some cases extended themselves to buy bigger houses, vacation homes and investment properties.
- While most investors initially agree to geographic diversification of their equity investments, many find it difficult to stick to that commitment. After a period of strong performance such as the U.S. sees today, the instinctive response is often to heavy up what’s been doing well and to abandon what’s been underperforming. Ideally, investors should follow Warren Buffet’s advice when he said, “…be fearful when others are greedy, be greedy when others are fearful”.
- Recently, deviating from investment plans has taken a new form. Immediately after 2008, a search for safety led to large flows out of stocks and into bonds or even cash, meaning that some investors missed the recovery since the market bottom, which has since rallied 135%. Additionally, to the extent that investors were buying stocks, many only had an appetite for stocks that pay high dividends and are viewed as an alternative to the secure income from bonds.
In the words of 20th century American journalist H.L. Mencken, “For every complex problem, there is an answer that is clear, simple and wrong.” Each of the above examples was seen as a clear and simple answer to the complex problem of where to find the best returns in an uncertain environment. In the search for that clear answer, many investors abandoned the plans that they’d agreed to in calmer times.