Quote for the Week

If you’re going to seek out volatility because that’s where opportunity is, you don’t want your entire portfolio to be volatile, you only want to make volatile bets within it. You have to be sure that there’s some systematic arrangement of the bets that you make so that the portfolio risk in the total portfolio is not as volatile as the individual components. One of Markowitz’s great insights was precisely that. That you can take a lot of high-risk bets — as long as they’re not correlated — and come out fine…

As I said, the markets are macro-inefficient. They can go haywire. That is a matter that you deal with through your asset allocation in the first place, so that you don’t get killed if the totally unexpected hits you in the face…

My own affairs are run that way because I know that extreme outcomes can happen and I don’t want to get killed. But that doesn’t mean that I’m not making bets in the middle of the portfolio somewhere. — Peter Bernstein (source)

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Quote for the Week

I begin with something different from the probabilities or that range of outcomes, but really saying if I do this or I don’t do this, and I’m wrong, what are the consequences. This is a way to begin. If I decide I’m scared of the market and I don’t go in, and it goes up through the roof, how much difference is that going to make to me? Or if I do go in the market, and it goes down, what is that going to mean to me? And so — because you know it’s going to do one or the other. And what difference does it make? The first thing is to think about consequences of being wrong because all of us, every day, are faced with the possibility that the decision we make, no matter how carefully reasoned, can turn out to be wrong. And then what does that mean to me?

Often, not much. Often a whole lot. And so they kind of gray the decisions that way…

I think there’s a time when you have a kernel of securities based on optimistic expectations. By and large, the most awful things don’t happen, and then some investments on the outside to cover those extreme outcomes. This is kind of the structure that you use. I don’t think you make disaster the core of your investing because if you — that’s a very expensive decision to make if you’re wrong. — Peter Bernstein (source)

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It was a mediocre start to the year for U.S. markets then it got worse. The S&P 500 dropped 4.6% in first three months of 2025. On the bright side, international and emerging markets rose.

A diversified portfolio was likely flat over the first quarter. So not great or horrible, considering its only three months and performance over the last two years.

That changed on April 2nd. Liberation Liquidation Day started the worst selloff since March 2020. The announcement of massive widespread tariffs — an average of 24% — not seen since the 1930s wiped out any gains over the last three months and added to the losers. It’s moronic, self-inflected, and unnecessary.

If there is a lesson in all of this, it is:

1. Never underestimate the power one idiot has over the global economy.
2. Diversification matters.

The three months to start the year, and especially the last week, bring the point home. We may have little control over the idiocy of those in public office (beyond elections), but we do control how we manage that risk in our portfolios.

The point of investing is as much about protecting the money you’ve already made as it is about growing your money further. Diversification does both…and more.

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Quote for the Week

Ever since the Compagnie d’Occident of John Law (which was formed to search for the highly exiguous gold deposits of Louisiana); since the wonderful exfoliation of enterprises of the South Sea Bubble; since the outbreak of investment enthusiasm in Britain in the 1820s (a company “to drain the Red Sea with a view to recovering the treasure abandoned by the Egyptians after the crossing of the Jews”); and on down to the 1929 investment trusts, the offshore funds and Bernard Cornfeld, and yet on to Penn Square and the Latin American loans—nothing has been more remarkable than the susceptibility of the investing public to financial illusion and the like-mindedness of the most reputable of bankers, investment bankers, brokers, and free-lance financial geniuses. Nor is the reason far to seek. Nothing so gives the illusion of intelligence as personal association with large sums of money. — John Kenneth Galbraith (source)

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The asset class, sector, international, and emerging markets quilts are up-to-date for the first quarter of 2025. You can find interactive versions of each here:

• Asset Class Returns
• Sector Returns
• International Market Returns
• Emerging Market Returns

You can also download copies here or grab the images below.

I’ll have a deeper dive into the data next week. So far, the lesson this year is diversification. You can see this within indexes, like the S&P 500, or in a more broad portfolio allocation.

For example, the S&P 500 lost 4.6% in the first three months (4.3% when you include dividends). Only 39% of the S&P’s component stocks performed worse than the index. 46% had a positive return through March.

The Mag 7, the biggest companies in the index — all tech and praised last year — collectively averaged an 18.4% loss (ranging from -1.6% to -35.8%) and led the decline in the Info Tech and Communication Services sectors. While Energy, Consumer Staples, Utilities, Real Estate, Financials. and Materials sectors were positive. Consumer Discretionary was the other standout loser.

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