If you thought achieving income yields was difficult, life will only get harder—the Fed that giveth can taketh away. Just as investors were getting accustomed to the taste of at least modestly non-zero rates, expectations have shifted swiftly.
The 60/40 portfolio, a strategy of dividing assets between 60% large cap equities and 40% bonds, has long served as the de facto benchmark for risk adjusted returns. The sizable equity allocation allows for decent upside capture and long-term growth, while the fixed income pool dampens the volatility inherent to stock ownership.
Mental accounting is a truly defining feature of the human condition. We naturally sub-divide and categorize all sorts of events and resources, and not just with money either; it is a coping mechanism for our brains.
While diversification may be one of the most common refrains in finance, the irony is that it is home to widespread misconceptions among investors, both novice and seasoned alike. Everyone intuitively understands the wisdom of “don’t place all your eggs in one basket” – such logic extends to everyday life – but investors often find themselves with far fewer “baskets” than they even realize.
What factors account for this discrepancy in diversification?