The Beauty of Making the Wrong Choice

We make thousands of choices every day…Which shoes to wear, where to stop for coffee, and, yes, where to invest.

But as we know, sometimes it rains and we should’ve worn rain boots instead of flip flops, sometimes we stop at the coffee shop with a long line instead of the one down the street with no wait, and sometimes we buy investments in anticipation of one thing happening and it doesn’t materialize.

For a minute, let’s talk about flip flops. Specifically, the process you’d go through to choose to wear flip flops.

When getting ready for the day you might think:

What do I need to do today that might affect my shoe choice?

What could cause my plans to unexpectedly change?

What is the weather forecast?

Should I prioritize style or comfort?

What will others around me be wearing? Should I fit in or stand out?

Sometimes it’s obvious that we should wear flip flops; like if I were meeting a client who is a big Jimmy Buffett fan at the beach and the forecast is clear. But other times we don’t have that much information in advance and a safer bet — like some nice sneakers— makes sense.

The good thing about this choice is it’s not life and death, it’s just shoes. But in the absence of crystal clear foresight, there are safer bets like sneakers and riskier ones like flip flops or high heels or snow boots.

Of course, this writing is not about shoe choice. It’s about the fact that we all make wrong —or at least suboptimal— choices regularly. The important thing is that we understand when to make the safe choice and when to be more targeted and specific. When we know that we’re going to be making suboptimal choices we can shift our energy to helping ensure our bad decisions aren’t the kind which can disproportionately ruin our day, week, month, year, retirement, etc….

So, we covered flip flops, now let’s talk about investing.

Diversification means you’re guaranteed to make the wrong choice

Below is one of my favorite graphics from Callan; it shows the best performing asset class at the top, worst at the bottom.

I like this chart because it’s a succinct reminder of what’s happened in the past; a reminder we often need because us humans tend to focus on what just happened when considering what we think will happen in the future.

Here’s the chart:

Source: Callan. Click image for disclosures.

On the far right column for 2021 you can see last year was great for Large Cap Equity (i.e. big US stocks) with a return of 28.71%. It was equally bad for Global Ex-US Fixed Income (i.e. bonds issued outside of U.S. corporations and the U.S. government) with a -7.05% loss.

Now rewind to 2002 on the far left of the chart… A very different story. Global Ex-US Fixed Income was the best performing asset class (22.37% gain) while Large Cap Equity was the worst performer (-22.10% loss).

Tip: I keep a version of this chart near my desk at all times, it provides helpful reminders of the past.
If you want me to mail you one, just shoot me an email.

Globally diversified investors over the last 20 years would have participated in the rallies and declines in the asset classes above, and their diversification would be both the reason they were often right (by owning the best performers), but also the reason they were regularly wrong (by owning the worst performers).

Diversified investors also do a good job at realizing that market forecasts are nowhere near the accuracy of typically-reliable weather forecasts (especially here in the Phoenix Area). When investing we have very little certainty about the future, so we have to consider the more reliable bet which is better suited for a variety of possible scenarios.

The reliable bet is rarely the best thing, but it’s also rarely the worst.…And that, my friends, is The Beauty of Making the Wrong Choice — it means you’re also likely to be right at the same time because you’re realized being wrong was inevitable. Remember this when building your portfolio.

That’s all for now.

Onward,

Adam Harding
Advisor & Owner @ Harding Wealth Inc. | Wearer of Flip Flops | Optimist | CFP
www.hardingwealth.com/team


*Diversification does not guarantee positive returns or eliminate risk of loss.