What Thanksgiving Can Teach Us about Investing

What Thanksgiving Can Teach Us about Investing

Leave room for true diversification in your portfolio

By Longboard Staff
Category: Diversification

The mother of all American feasts is upon us. The traditional Thanksgiving table features turkey, side dishes and, if we’ve managed those two parts correctly, a huge helping of pie.

It’s a bit like allocating to your portfolio. On Thanksgiving, our best intentions to eat sensible portions are often overridden by short-term gluttony. We saw some of that over the summer in the equities market, and now savvy investors are rebalancing to prepare for a season of lower returns.

Turn down the turkey

Now let’s court a little controversy. The first problem with Thanksgiving is the turkey. There’s a lot of hype behind this main dish.

But let’s be honest. Just like equities, turkey is touch and go. When it’s tender, juicy, and you get the light or dark meat you like, turkey can be delightful. However, it’s still nearly eight times as unpopular as chicken overall, according to the latest USDA production numbers by pound.

That may be because turkey can also be dry, half-frozen or greasy. It can even burn down your house – depending on your cooking method and experience. Stocks are just as unpredictable.

The side dish lacks salt

Good thing that Thanksgiving also includes side dishes. Traditionally, these are bland, over-cooked casseroles that are designed to be comforting. But if you knew exactly what they contained, you might think twice.

To us, that sounds like the current state of bonds.  

In the past, we looked to fixed income to provide portfolio diversification. Then interest rates dropped dramatically and investors were forced to reach for yield. Some investors still don’t realize that by doing that, they added investments with much higher correlation to equities.

In short, they were filling up on risk – without the diversification benefit.

Save room for pie

Which brings us to the sweetest part of Thanksgiving. Pie is arguably the most reliable part of the meal.

People bake it and they buy it—in pumpkin, apple, pecan and more. Even if the meal is terrible and the crust is a little singed, pie is still delicious with a dollop of whip cream on top.

The diverse nature of the average pie spread reminds us of managed futures. By taking a different kind of risk, managed futures can help lower overall portfolio risk and produce returns. In fact, only elite investors know that managed futures performed positively in 13 out of 15 of the S&P 500’s worst-performing months. That is a true diversifier at work.

But like pie, a tiny sliver of managed futures is not going to get the job done. Longboard research shows you must invest at least 20 percent of your portfolio in a true diversifier like managed futures over a full market cycle to get the long-term benefit that most asset managers seek.  

If you’re ready to do that, give us a call. We think that decision will make you very thankful in the long run.