Was Warren Buffet right all along and you should just invest in the S&P 500 with a bit in bonds as a hedge? Yes — at least so far.
I had the chance to recently speak with a financial planner who was frustrated with his life’s work managing money for other people. “No matter what I did, I could never beat the S&P 500,” he conceded. This is normally when I share my smug efficient-markets-hypothesis-adherent wisdom, and how active management always comes up short. But as we chatted about his strategy, I realized he was also a believer. His problem, though, was not picking the wrong stocks; his problem was that he was doing everything I thought was right.
Let me explain. Financial theory suggests that investing in the benchmark S&P 500 Index is a good starting point for investors. But doing so leaves you under-diversified. I learned early on that the one of the biggest mistakes investors make is home bias, which is investing too much – or even entirely - in one’s own country. Many studies have shown that you’ll get a better return by investing in other countries as well and with less overall risk.
Continue reading the entire piece here at Bloomberg Opinion (paywall)
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
Photo by Алексей Белозерский/iStock
