John Maynard Keynes on Being Right… Learning from Legends

"I'd rather be vaguely right than precisely wrong." I love this quote from economist John Maynard Keynes. I think it speaks...

“I’d rather be vaguely right than precisely wrong.”

I love this quote from economist John Maynard Keynes. I think it speaks to why diversification, when investing, is so important. If we had a crystal ball we would know where to invest 100% of our money at exactly the right time. Until we find one though, we need to diversify!

Anyone familiar with the Callan Periodic Table of Investment Returns knows that from year to year the top performing asset classes vary. Not only do they vary, but usually the ones that perform the best for a time tend to underperform other asset classes in future years.

For example, if you sat and watched the S&P 500 Growth asset class return 36.52%, 42.16% then 28.24% in ’97-’99, you likely thought this was a great asset class and you need to put 100% of your funds there. However, in ’00-’02 you would have returns of -22.08%, -12.73% and -23.59%. You likely invested at exactly the wrong time, buying at the top and riding the investment down and selling at the bottom.

We are human, and therefore irrational, and our behaviors tend to hurt our investments.

If we try to be precise when investing, we are likely to overweight past results and chase returns. Instead, we can be vaguely right by owning a diversified basket of assets, where the good and bad investments somewhat offset each other, and we are able to earn a higher return than we would by keeping our money in a bank or under our mattresses, outpacing the silent killer, inflation.

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