Last year was a very clear example of how investors can be
blinded by biases. 2014 was unique in that most major equity markets performed well below average except for
the U.S. large cap market (as measured by the S&P 500). The S&P 500 was up 13% last year while
international markets were negative and very little else returned more than
about 4%. Many investors immediately
became nervous over their portfolios.
Some even mulled over the idea of completely getting out of anything
outside the U.S. There were a lot of
strong reactions to just a single year of performance.
Every year out of all the major assets classes there is going to be a top performer and a bottom performer. It is rare that anyone ever questions why they did not own only the top performer. No one knows which asset class will be the best performer on any given year, and it is universally agreed that diversification can help reduce risk and increase long term return. So why did last year seem to get some investors so riled up?
