It’s a cliché that investors should diversify. Sadly, there are times when the crowd forgets. I fear we’re in such a period now.
For a few years, many investors have been convinced that the stock market always goes up, that the US market always trumps the international market, and that large US stocks (preferably tech) are the only thing worth buying. Over the last 5 years, all that has been true.
Which tells us precisely nothing about what will happen over the next five years.
Bear with me while I throw just a couple numbers at you.
I looked at four consecutive 5-years periods, beginning in 1996, 2001, 2006 and 2011. I compared large stocks, small stocks, non-US stocks and bonds.
The pattern is clear: there is no pattern. For example, large US stocks were the best in two periods but they were the worst in two others. Oh, by the way, it’s not as if it went best/worst/best/worst. That would have been too logical.
But what strikes me the most is how huge a difference there is between the best performer and the worst performer. On average, over 5 years, the best performer did 100% better than the worst performer.
The lesson: just when you think you understand what is worth investing in, everything changes. You simply cannot predict the future. So please, follow these three simple rules of investing: