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I believe we live in the golden age of investing.  Not only is it easier to invest, but the costs have decreased and strategies that used to be available only to high net worth clients are accessible to any investor.

But the myriad of choices and strategies can be overwhelming, especially when the markets seem to be more global and more complex.

To thrive in this new age of investing, it’s crucial for investors to adopt an open-minded approach to capital allocation. While the future remains uncertain, diversifying beyond the familiar could prove beneficial in the long run.

Embracing the following principles can guide us in maximizing returns in this evolving investment landscape:

Don’t rely on what worked recently.

Recency bias says that we give more importance to recent events.  In investing, we can irrationally believe what happened recently is going to continue to happen.

The most recent decade of investing was bookended by two significant events—the Great Financial Crisis and the Covid Crash.  So, what were the themes of this decade?

  1. US stock outperformance over international stocks
  2. Mega cap tech companies dominating performance
  3. Falling interest rates and cheap money

We’ve grown accustomed to these themes and it’s tempting to invest thinking we’ll have a continuation of the recent decade.  As a result, I see many investors heavily overweight US stocks, tech companies, and using bonds as their only diversifier.

But what if the next ten years isn’t like the previous ten years?

Based on the past two years, our world seems structurally different.  While only time will tell, a potential sea change brought on by deglobalization, higher interest rates, and the transition to cleaner energy could have lasting effects on the markets and your portfolio.

Be agnostic to the types of available tools.

Recognizing that there’s no one-size-fits-all solution in investing, maintaining an open mind about available investment strategies is crucial.  Contrary to what some investing pundits say, investment strategies aren’t black and white.  Lots of strategies will work, and each one will have its day in the sun.

Instead, evaluate various investment strategies based on their potential benefits.

We’ve written about tools such as structured notes and hedged equity.  These investment tools are designed to provide downside protection and more certainty to your portfolio. 

Besides these tools, strategies that were previously inaccessible are now offered in easy-to-buy mutual funds or ETFs.  This includes hedge fund-like strategies, trend following managed futures programs, and other alternative diversifiers.

Don’t fall prey to “line item trap”.

A portfolio is a collection of individual investments.  Hopefully each of these items aren’t similar in how they respond to certain market environments.  By adding in multiple uncorrelated strategies, you can decrease risk without sacrificing your expected return.

But too often investors fall victim to the “line item trap”.  Instead of seeing your portfolio as a whole, you scrutinize the individual components.  Recent performance divergences cause you to get rid of a crucial strategy with recent underperformance.

This behavior is understandable.  You want to cut the losers and feed the winners.  But this causes your portfolio goals to change as you sell out of valuable strategies at the wrong time.

Wrapping it up

The investing landscape today is different than it was even a few years ago.  For investors seeking ways to maximize returns in an unknowable future, it’s important to diversify beyond the familiar tools that worked in the last decade.

To navigate the uncertainty of the future, investors should resist the temptation to rely solely on recent successes, explore a diverse range of available tools, and approach their portfolios holistically.

A diverse toolkit not only mitigates risk but also enhances the potential for better outcomes in an ever-evolving market.