It may be tempting to concentrate your holdings into one or two
hot asset classes in hopes they'll continue to sizzle in subsequent years or to try to predict which investments currently at or near the bottom of the rankings will move up the ladder.
What was
the hottest asset class at the end of 2017?
Given the atrocious record of fund managers to correctly guess the next
hot asset class, I'll take the math every time.
Rather than trying to predict the next
hot asset class, they get exposure to all of them at all times.
For several years now, I've been encouraged that Canadians are coming around to the idea that trying to pick winning funds or this year's
hot asset class is a loser's game.
It's mathematically impossible for a diversified portfolio to outperform the year's
hottest asset classes.
If that's not enough, the policy forces us to take some profits from
the hot asset class.
The move will allow institutional investors to get in on the world's
hottest asset class using a more conventional market tool.
Not exact matches
As I noted in an earlier post (See
Asset Class Returns for 2009), Canadian REITs were red -
hot last year, posting a total return of 55.3 %.
Bond funds become particularly problematic when rates get really low, as
hot money comes flooding into the
asset class — and when rates eventually rise and the
hot money leaves — long term investors will be left with losses they can't simply wait out to become whole again.
That is, instead of investing in an equal mix of the four
asset classes, the
Hot Potato plunges into the single
asset class that fared the best over the prior year.
Why reduce exposure to the
asset class that's on a multi-year
hot streak when we know that rebalancing can lower returns in trending markets.
If you're like most investors who simply follow their emotions, you'll likely add the money to whatever
asset class is
hot.
But the
Hot Potato diverges significantly from the classic version because it employs shorter holding periods and focuses on a single
asset class at a time.
As I noted in an earlier post (See
Asset Class Returns for 2009), Canadian REITs were red -
hot last year, posting a total return of 55.3 %.
This isn't a burning
hot issue at present, but I have been impressed with the increasing amount of money getting thrown at esoteric
asset classes by pension plans and endowments, in an attempt to diversify and gain higher total returns.
Investors seem to be programmed by nature to fail at investing, pouring money into last year's
hot stock, industry or
asset class.
The truth is, no one can reliably predict which company, strategy, or
asset class will be next year's
hot performer.
Each month the global
hot potato looks back over the last 12 months and picks the
asset class that has performed the best.
Personally, I will continue to avoid potentially «
hot» investments and focus on maintaining a broadly diversified portfolio with low correlations among
asset classes.
And to be fair, the company has been open about where it believes it has fallen short in adjusting to a market that went from cold to
hot virtually overnight as the total market capitalization of the
asset class exploded at the start of 2017.
It's an
asset class that has been
hot for a decade, said Jeffrey Roseman, a founding partner of Newmark Grubb Knight Frank Retail.