Investment Strategies - Dogs, Best or Balanced

I am asked on a regular basis what the best investment strategy is. The short answer is – one you stick to. While that sounds silly, it is true. I’ve had now former clients over the years who constantly shifted their investment strategies based on a variety of reasons. News coverage, gut feelings, and conversations with family and/or friends were the most popular. Regardless, it was hard to make progress toward any goals when things kept shifting.

However, I am not here to talk about sticking to a strategy. At least mostly. Instead, I thought I would share some findings from a recent article I came across on three popular strategies.

The first strategy is to put your entire portfolio into what was the worst performing asset class the year before. This is basically the dog strategy. Yes, it has its own name.

Next strategy is the complete opposite. It is to take 100% of the portfolio and invest it in the best performing stocks of the past year. I don’t recall a nickname for this one, but I guess it is basically a momentum strategy. You know, ride the hot hand and hope that the strong performance from the previous year continues.

The final strategy is a simple balanced portfolio. The example in the article was a portfolio made up of 60% in large cap US stocks and 40% in investment grade bonds. Pretty simple. Oh, and if you think this is not realistic, I have read stories with retired money managers whose entire portfolios are simply two holdings like this.

Back on topic here. The article took $10,000 invested January 1, 2011 and compared what it looked like a decade later at the conclusion of 2020. Below are the findings.

The Dogs strategy was just that – a dog. It brought up the rear with performance. The $10,000 turned into a whopping $10,812 after a decade. That’s less than 1% a year in growth which means it really lost purchasing value if you factor in inflation.  I can just hear supporters of this strategy screaming – “This strategy works better when the market is going down.” Maybe that is true, but the last decade has not been good for it. The various worst-performing classes included Cash, Gold, Commodities, and Emerging Markets. Cash appeared 5 times. No wonder it did so poorly.

The opposite strategy came in second place for performance. The $10,000 turned into $17,387. Definitely better numbers as the overall growth was 74%. Here the asset classes were Gold, US REITs (Real Estate Investment Trusts), US Taxable Muni Bonds, US Small Cap Stocks, US Large Cap Stocks, Emerging Market Stocks, and Cash. REITs had the most appearances at three.

The simple, two-holding strategy did the best. $10,000 turned into $25,414. So, growth more than double second-place with total growth of over 150%. 154% to be exact. No reason to mention the holdings here because it was just two of them held equally.

One bonus comment here with these three approaches. The Dogs strategy had the most volatility and the balanced had the least. Best performance with least volatility? Sign me up!

I am curious what these three strategies would look like over the last 30 years, but the article only looked at the last decade. Maybe the results would be the opposite or at least closer. Again, back to the point of any strategy works if you give it time and commit to it. Oh, if you would like the source article just send me an email.

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.