No doubt that as the capital markets start out 2014 either moving down or barely managing to tread water, our thoughts normally turn to "what do I own right now that I probably shouldn't?" I can hear the trades taking place even as I write this blog. 

But venting out the old in favor of the new may not be the best option that you have at your disposal. 

We always tend to pay and invest too much credibility in short term data.  And, that disconnect is off at more than one level.  If we have "long-term" goals then why wouldn't we match that with a view based on long-term data instead. 

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In a recent blog post, Behavior Gap expert Carl Richards formulates a cogent argument for continued diversification based on the principal that what was once performing well, will one day not be and likewise, what was once not performing well, will one day be doing just that. 

In a seminal book on Asset Allocation, portfolio manager and financial advisor Roger Gibson noted that on average, your portfolio should at least be aligned in a manner consistent with overall global asset distribution. So, whether your emerging market stock or bond funds are performing well or not, they deserve a place among a well diversified portfolio and that level of representation in your portfolio should match your risk propensity and tolerance. While I don't think that emerging markets should dominate, surely they should be represented in your holdings and at a level consistent with your risk tolerance. 

My best bet would be this; if we look at past successful "investors" or "portfolios" or "Clients" we're going to find two things that really account for much of their long-term success; 

1. They tend to stay the course and invest more in a sound process than short-term data, and; 

2. They do the things that most people are not willing to do, they put money in when markets are declining and frankly, that means your betting on your losers, not getting rid of them

It's hard to argue that for many 401k plans are viewed as their most successful investment.  But can we tell why that's the case?

For many, it's their only savings plan, I get that, but that's not necessarily what makes it the most successful. I'll offer a counter claim to the success; 

1. Because contributions are made out of each payroll period, money goes in no matter what, and; 

2. Because investment options are so damn hard to discern for the average investor they're more likely to just stick with the allocation that they chose when they started and not monkey around with it all that much

That captures two important initiatives; 

1. Doing what most people won't do (making contributions to investments in declining markets) and; 

2. Staying the course

As an advisor I understand more than most the desire to avoid market declines and feel that we can side step adversity and it's easy to be fooled that we can.  Let me give you a real story to support that. 

A few years ago, we had a Client that demanded that they go to all cash during the very end of the 2008 decline. No matter what we did we couldn't convince them that staying the course was their best option. So, we agreed in the end that we'd move them to cash. That was the easy part; getting out is always the easy part. 

What we struggled with was getting them back in.  It never, to their way of thinking, seemed like the right time to put the money back in the market. They missed the first 11% of the run up that followed the rebound that started in 2009.  When we finally were able to convince them to get back to fully invested, we asked the following question?

"If, by getting out of the market we prevented a 3% decline and missed an 11% run up on the other side, didn't we effectively make avoiding a 3% loss into an 8% loss?"

We did. But you can't believe how hard it was for us to convince our Client of that fact. To their way of thinking, they avoided a loss.  Math would indicate that exactly the opposite occurred, they created a larger one. 

If the value of diversification is real, which it is, then one other factor remains immutably true about your winners, your losers and investing in general; 

"If they don't ring a bell to tell you when to get out, they sure as hell don't ring one to tell you to get back in....."

Change your way of thinking...your losers aren't your losers, they're your "just not making money now" assets.