The Power of Independent Thought

The recent Wall Street Journal article “How Many ‘Greater Fools’ Does It Take to Make a Bubble” further explores the idea that investors can be their own worst enemy. Citing a recent study conducted by Colin Camerer, the article suggests “that traders pay more attention to with others are doing in the midst of a bubble than they do in placid markets.”

This idea of “keeping up with the Joneses” not only shifts the focus onto short-term, relative returns, but it can even cause investors to “ride the bubble,” focusing on the frenzied price inflation rather than underlying fundamentals.

Psychological factors play a very large role in investing. At Balentine, we help our clients combat these natural tendencies by structuring portfolios using our building blocks approach to diversification. This unique approach to diversification groups assets by risk type as opposed to asset classes or characteristics of the underlying securities. This portfolio design allows us to concentrate our efforts on reducing exposure to downside risks and smoothing volatility, while still capturing a high degree of investment upside.

In addition, our Investment Strategy Team ignores the white noise of what everyone else is doing and instead focuses on the things we can control:

  • Risk – finding exposure less dependent on the direction of equity markets or interest rates to generate returns;
  • Liquidity – keeping “dry powder” on hand;
  • Tactical rebalancing – rebalancing a portfolio opportunistically as opposed to a calendar-driven approach;
  • Fees – working to keep the fees our clients pay as low as we can.

Focusing on what we can control allows us to stay grounded and avoid the constant drone of market hype. Put simply by Jason Zweig, “in short, the best way to avoid a bubble is to think for yourself.”

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