In a recent post from Seth Godin, he explores the admissions process at our nation’s best schools, and there are some perfect parallels with investing. He notes that a significant percentage, 20% or more, of the applicants are extremely well-qualified to attend the school, yet only 1/4 of the qualified pool will actually be offered admission. More importantly, the admissions staff will agonize over the choices for weeks, which is time-intensive and expensive. In reality, picking a random 25% of the “extremely well-qualified” pool would likely yield a similar (successful) outcome. In other words, they’d still end up with a brilliant class of some of the world’s brightest students of that vintage.

Hmmm. Sounds eerily similar to active-investing versus evidenced-based investing. The basic choice is either:

• Over-pay to under-perform by hiring an active manager. Then watch them painfully and expensively try to pick the next winner based on extensive research and interviews with the management teams of the best companies out there, or
• Take advantage of the academic evidence. Holding thousands of these companies across the globe in low-cost, tax-efficient investment vehicles and tilting to the factors that have higher expected returns have historically outperformed over long periods of time.

Our clients and fans know which camp we fall into. In Seth’s words: “If you don’t have proof that picking actually works, then let’s announce the randomness and spend our time on something worthwhile instead.” Importantly for our clients, Hill’s approach yields significant additional benefits because it allows the Hill team the time and energy to focus on each client’s unique situation, goals, and dreams. Whether it be passing more to heirs, buying a vacation home, or supporting their favorite charity, we strive to help our clients do so with more clarity, confidence, and purpose.

As follow-up to our prior piece about your neighbor’s returns winning last year, we have a simple historical comparison of our typical portfolio against two benchmarks: the S&P 500 and a global index portfolio. Take a look.

2014 may go down in financial history as the year that globally diversified investors like us lost. Your neighbor and most other investors won, and they did so with their concentrated, US Large cap portfolio. Large U.S. companies enjoyed a double-digit year, while other markets experienced negative or mediocre results, especially for international, emerging market and small-cap stocks. In a recent article from Larry Swedroe, he points out that this is a great test of our investment temperament.

Although the U.S. S&P 500 Index has outperformed the MSCI EAFE (international stock) Index since 2010 by an annualized return of around 9 percent, the MSCI EAFE happened to deliver about the same outperformance in reverse from 2002–2007. Clearly, the tables can turn abruptly and destructively for the nondiversified investor. As Swedroe says, “Diversification is like insurance. It’s insurance against having all your eggs in the wrong basket.” Remember, a year is just a year in a multi-decade investing journey, which is why we always say, “Take the long view.”

[See our follow-up post for additional data.]