Even the Brilliant Choose Balance

Why doesn't a Nobel Prize winning economist try to beat the market? Maybe the story below will give solace in turbulent times. The moral of the story is: Asset allocation is just another word for peace of mind.

If you were investing in the stock market during the first seven months of the year, it's possible you made some big changes in your asset allocation. According to Morningstar's latest analysis, outflows from U.S. equity funds (including mutual funds and exchange traded funds) so far this year exceeded any other full year since 1993.

And where was all that money going? Primarily to international funds - even as the headlines about problems with the Euro, Greece and the Swiss franc made it appear that the rest of the world was in deep trouble.

So far this year, investors have withdrawn $64 billion from U.S. funds and put $158 billion of new money into international stock funds. In fact, the most popular category -- foreign large-blend funds -- had inflows of $21.3 billion in July, greater than the next four top-asset-gathering categories combined in July, according to Morningstar.

So was that a good trade-off?

That strategy worked --until the global market decline that hit all stocks in all countries. Morningstar reports the total return of the foreign large-blend category through July 31, 2015 was 6.7 percent - compared to only 3.35 percent return for the S&P 500 during the same period.

Those who took the apparent risk of buying into foreign shares at the time of global financial woes were rewarded. But it was a strategy that involved making a tough decision. While many people bemoan the fact that they are always getting in -- or out -- at the "wrong time," this report shows that -- until lately, at least -- billions of dollars in investors' money did make the correct move, and had the profits to show for it.

(It's hard to "beat" the market when the entire world is in a selling panic!)

More importantly, what does that mean for you as an investor?

Should you suddenly start buying what's out of fashion and making negative headlines? In that case, you have plenty of choices. Energy-related stocks are certainly the subject of scary forecasts and negative realities. At some point there will be a bottom -- but can you afford to guess about when that bottom will be made? In the meantime, there could be more declines.

This column has noted on more than one occasion that professional money managers regularly fail to meet their benchmarks. In 2014, 86 percent of large-cap managers failed to beat their benchmark, and 89 percent failed in that task over the past five years. That's probably why the Morningstar report also highlights the fact that the money that did flow into U.S. equity funds overwhelmingly went into "passive" (index) funds as opposed to actively managed funds.

If the pros can't beat the market, does it make sense for you to try? Or are you better off diversifying across asset classes?

Basic diversification means you would include domestic and international stock funds, as well as large companies and small -- and also some risk free assets in money market funds, and some income-oriented assets such as shorter-term bond funds. That way, you can never be "all right" - but at least you won't be "all wrong"!

And if that seems like a "cop-out" to you, listen to this story about the investing habits of Nobel prize-winning economist Harry Markowitz, who was lauded for his concept of the "efficient frontier" in investment management. It's a story told in a very insightful new article by Marshall Jaffee of Jaffee Asset Management in a column posted by ThinkAdvisor.

Jaffee quotes Markowitz as saying: "You know, if the stock market goes way up and I'm not in it, I'll feel stupid. And if it goes way down and I'm in it, I'll feel stupid. So I went 50-50."

Says Jaffee: "Markowitz is a brilliant academic who knew he had a unique and valuable insight. But he had enough self-awareness and emotional honesty to acknowledge that in his own situation it was more important to have simplicity over sophistication and comfort over competitive returns."

That should make you feel that you're in good company if you choose to simply, diversify, and balance your investments -- instead of trying to beat the market.

Of course, sometimes the market is absolutely irrational -- buffeted by emotions, expressed in waves of buying and selling. At times like that, the best you can do is stick to your asset allocation, which you created sensibly in calmer times. The challenge is perspective and self-discipline.

One thing is sure: If we really do come to the "end of the world" scenario, it won't matter a bit which stocks you own and which you sold. And that's The Savage Truth.