Traders enjoy the thrill of a bet that works out. But, often, performance chasing doesn't even result in owning the top-performing assets.
Actually, "often" is a kind and gentle way to phrase that. The correct phrasing would be "nearly always." That's because most U.S. investors have a myopic focus on domestic stocks. In particular, domestic large-caps.
So let's dissect that.
For starters, we all know by now that in the third quarter, the S&P 500 returned a negative 6.44%. Not the return of anybody's dreams, but hardly the bloodbath that you'd have thought.
Among the major equity asset classes, only REITs outperformed large-cap U.S. stocks. So did bonds. For example, the Barclays U.S. Aggregate Bond Index, which tracks the domestic investment-grade bond universe, was up 1.23% for the quarter.
Other equity asset classes, such as large U.S. value stocks and large global stocks, underperformed the S&P 500.
I'm not rehashing third-quarter performance just for fun. Instead I'm making the point that large U.S. stocks were not the best source for those attempting to ride any kind of performance wave in the third quarter.
As for any particular quarter, it's anybody's guess. And that, dear readers, is the point.
If you wanted a basket of equities that beat other global stocks, then Ireland would have been the best bet. As a group, stocks of Irish companies were down just 1.10% in the quarter.
So should you have known, somehow, to buy Irish stocks, going into the quarter? Perhaps, as they were the leaders among developed-market stocks after the second quarter. But what U.S. investor would gamble to go all-in with Irish stocks?
Performance chasing may work out occasionally. Mostly, it seems to work out when people pick a stock during a roaring bull market, then pat themselves on the back for "doing well in the market."
It works that way with advisors, too. Plenty of people have an advisor, or heaven forbid, a broker, who oversees a portfolio which, remarkably, rises as equity markets rise. The portfolio could be taking too much or too little risk for the client, but as long as it goes up, people don't dig much deeper. In other words, the proverbial monkey throwing darts could have invested in a portfolio that rises in favorable market conditions.
Don't congratulate yourself too much for picking winners, because they're probably not the biggest winners. They're just the ones U.S. investors hear about.
Most of those are large-caps. You know, the ones that everybody talks about. That's unfortunate, because U.S. small-caps outperformed large-caps by a wide margin in the second quarter. However, the two asset classes switched places in the third quarter.
Yes, Netflix (NFLX) has been a stock picker's dream this year. But so have Russell 2000 components Manhattan Associates (MANH) and Tyler Technologies (TYL).
My advice to you today is: Don't limit yourself to one type of investment, such as large, U.S. value stocks, which are popular in these parts. The world of investments offers much more opportunity.