It seems to me to be more than a little ironic that in a 12-month period where Pinnacle has set records for absolute portfolio gains, where our clients are basically thrilled with the recovery of their personal balance sheets, and where portfolios have fully recovered to make new highs since the beginning of the bear market in October of 2007, that I find myself worried about our returns relative to our benchmarks. I have written at length about the vagaries of choosing a benchmark for diversified portfolios, and how outperformance can be made to appear or disappear based on randomly adding or subtracting asset classes from the benchmark portfolio.
Nevertheless, our managed accounts portfolios are trailing their benchmarks in terms of total return for the twelve month period. While this underperformance has occurred with less risk or volatility than the market (our risk-adjusted returns still look great compared to both the S&P 500 and cash), it seems to me that average investors remain focused on short-term returns. Therefore, it bears our scrutiny. With that in mind, I thought I would clear up this relative performance question by sharing the strategy that is most likely to crush our two asset class benchmark (S&P 500 Index and Barclay’s Aggregate Bond Index) going forward.
First, we need to abandon any approach to value investing since market values are a notoriously poor market timing indicator. When focused on shorter-term time horizons, any attempt to evaluate market valuation or the economic cycle is basically a waste of time. Next we need to abandon multiple asset classes in our portfolios and only own the S&P 500 Index in our managed accounts. Since this is the risk proxy in our benchmark portfolio, we will avoid the risk that international stocks, commodities, real estate, and other risk assets will underperform over any short-term time frame. Next, we need to make large asset allocation bets so that we maximize our infallible investment forecasts. Taking the portfolio to 100% cash or 100% equity will enable us to crush the benchmark portfolios at will (as long as we are always correct in our assessment of market direction). Just to be clear, we have no intention of doing any of the above since we believe that it constitutes a high risk, if not foolish, investment philosophy. I just thought it would be fun to see it on paper.
