Most investors build a portfolio of traditional investments.
They seek diversification by investing in common stocks, corporate bonds, international stocks and hard assets like gold and cash.
Most use mutual funds or exchange funds to build balanced or diversified portfolios.
Using a 20-year Dalbar study completed in 2014, you may find some interesting results.
Stocks did quite well at a compound return of 9.9 percent, followed by corporate bonds at 6.2 percent, gold at 5.8 percent and international stocks at 5.0 percent.
So how did the average investor do during that same period?
The same Dalbar study revealed that the average investor had a 2.5 percent return.
How it that possible?
The average investor is people just like you and me.
They are subject to emotions and are vulnerable to the media. markets are doing well, the average investor is buying.
When economic news is bad, they sell.
Selling when markets are down often will reduce overall returns.
Another study I recently discovered in the Harvard Crimson reported on the investment returns of some of the largest university endowment funds for the year 2015.
When the S&P 500 index reported a 1.2 percent result, Yale reported a return of 11.5 percent, Princeton had 12.5 percent and MIT reported a 13.2 percent return.
So how did they do so much better?
There are two main answers.
First, these endowment funds take a long-term perspective.
Rather than planning for five, 10 or 20 years, they plan on a 50- or 100-year time frame.
If you consider the long term, during a one-year or five-year downturn, you don’t get too upset.
The second reason is that these university funds diversify.
They don’t invest only in stocks, bonds, and cash, they invest in a broad array of investments.
Their portfolios invest in assets classes like real estate, venture capital, energy, commodities and hedge funds.
Many of these assets classes may be negatively correlated to traditional investments. Often, these alternative investments will perform well when traditional investments are struggling.
Most of these endowments have strict rules to follow.
They still own stocks, bonds and more traditional investments but that may have as much as 50 percent in these alternative investments.
Is this a good pattern to follow for the average investor?
Maybe or maybe not, but it is interesting that the endowment investment committees maintain investment rules that help them avoid short-term emotions and media headlines.