Ever been in a lineup at the grocery store & switched to another line because it’s moving faster? Then the shopper ahead of you has their credit card declined! Most of us have done it, eh? And it’s a total crapshoot as to whether we win or lose. That makes it gambling. But it’s a gamble with little cost if we lose. And the elation of the occasional win makes it worthwhile. Many investors do the same thing, swapping stocks & funds based on which one is doing better recently. But when it comes to investing, we don’t always get to see the results right away. The reality is that reduced returns are more likely with this kind of behaviour. And this can have a negative impact on our financial well-being over the long haul.

There are few, if any, guarantees when it comes to investing. But chasing today’s hot stocks, sectors, ETFs, or markets usually results in underperformance. Today a growth strategy is the winner, next month it might be value, then it’s the turn of small caps, or emerging markets, & so on. But for most us, chasing what’s hot today usually doesn’t work that well.

For many DIY investors, a single, well-diversified fund or ETF is probably a better choice for the core of an investment portfolio. It might serve most of us well over a lifetime of investing. Buy that one fund & you buy everything at once. A young investor with an appropriate risk profile might go with one of the all equity funds like XEQT, VEQT, or ZEQT. An older or more risk-averse investor might choose one of the all-in-one funds that hold a bond allocation. The VGRO, XBAL, or ZCON (CNS) type funds from one of the big providers in Canada fit the bill here. Is one fund enough? These equity funds hold somewhere around 10,000 companies, from across the globe. Yes, that’s enough.

But, but, but … the S&P 500 Index has clobbered these funds recently. And the Nasdaq 100 Index has done even better. The American indices have outperformed most other county indices over long periods of time. So why might you do that boring global diversification thing? You do it because nobody knows what happens next. If we were having this conversation at the end of 1999 & you went all in on the S&P 500 Index, you could have turned $100k into about $104k by the end of 2010. A lousy compound annual growth rate of 0.35%. And that’s with all dividends & distributions reinvested along the way. Eventually it all came good & this index went on to ever greater highs. But would you have stayed invested for 11 years while the index did nothing? Meanwhile, if you put that same $100k in XIU, the iShares S&P/TSX 60 Index ETF, it would have grown to over $200k during that same period. Over that decade or so, the Canadian market trounced the American market. Had you gone all in on the Nasdaq back then, your $100k would be worth less than $62k by the end of 2010. This usually hot index went down. A lot. Could that happen again? I don’t know, do you? Do you feel comfortable going all in on the S&P 500 or the Nasdaq now? How about going all in on that hot stock that your buddy made a killing with?

Even younger investors might want to give the bond component a look, by the way. Yes, I know bonds are boring, old-person investments. And bonds got walloped in 2022, so who needs them, eh? But look at it from another perspective. The oldest bond ETF in Canada is XBB, the iShares Core Canadian Universe Bond Index ETF. It launched in 2000 so we’ll use the data from January 2001 to the end of 2010 for comparison. While the American indices languished, XIU turned $100k into more than $179k over this 10 year period. While this boring bond fund turned $100k into almost $176k. A boring bond fund almost matched the performance of the Canadian index & it dramatically outperformed the American indices during this decade. A bond allocation provides further diversification & this is another example of what diversification is all about. You probably won’t make a killing betting on all the horses in the race, but it might help you keep the shirt on your back!

It all boils down to this … nobody can tell the future. Nobody knows what happens next. And, when it comes to investing, the less you know the broader you go. When you don’t know, diversification can help moderate the effects of crazy fluctuations in one regional market or another. While a series of catastrophic events could drag down all markets globally, there’s a decent chance that some regional markets will hold up better than others. That doesn’t mean that a globally diversified portfolio, even one with a bond allocation, won’t go down, it will. But unless you know something that nobody else does, or unless you get lucky, you might do better by covering more of the bases. These globally diversified & all-in-one ETFs do that.

Now if you really want to play with something different, it might be fun to allocate a small percentage of your portfolio to one of the hot funds. Or even to whatever stocks you think are part of the next big thing. You may even win big with this allocation & then you’ll frown at the pedestrian performance of your globally diversified ETF. But the thing to remember is this: portfolio performance is measured over decades, not over mere months or even years. The results of your choices might not be apparent for 10, 20, or even more years. The caution in this tale is to be wary of allowing short term or recent performance having too big an influence on your longer term decisions. After due consideration, you may still choose to focus more on the American indices. Nothing wrong with that. But do it with your eyes open. And with an appreciation for how things might work over longer time horizons. Investing really isn’t like shopping, it’s a long game.

If you want to learn more about all this, & how to build a portfolio that might suit your needs better, read Double Double Your Money.

Happy Canada Day! 🇨🇦🍁🇨🇦

Important – this is not investing, tax or legal advice, it is for entertainment & educational purposes only. Opinions are my own, so do your own due diligence & seek professional advice before investing your money.