They did everything right — spreading out bets far and wide across bonds and equities in case things went south. Now, after heeding Wall Street's mantra to diversify for the long haul, these investors are watching with envy as the U.S. stock rally leaves them in the dust yet again.
The numbers are stark. Money managers who obeyed the financial industry's age-old wisdom to divide investments across markets and geographies are on an epic losing streak versus those who simply bought the S&P 500 and sat still.
In one example, out of roughly 370 asset-allocation funds tracked by Morningstar Inc., just one has managed to beat the index since 2009.
It's been a big lesson in futility, rather than a disaster per se.
Diversified portfolios have still managed to return around 6% a year over the stretch, going by a model kept by Cambria Funds. Yet the streak of underperformance is getting historic — and could get worse as the AI-fueled equity melt-up endures.
Broadly, diversified portfolios have trailed the U.S. large-cap stock index in 13 of the last 15 years, a stretch seen only once before in almost a century of data, per Cambria.
"If your neighbor has all their money in the S&P, then you look like a moron," said Meb Faber, the founder of investment firm Cambria and a portfolio-theory expert.
For small-fry investors and big money managers alike, the psychological toll of falling behind creates pressure, particularly for those sticking with the playbook.
Institutions from pensions to endowments and foundations have $21 trillion stashed in conventional diversified strategies that spread money across a wide range of investments including bonds, stocks, real estate and cash, a recent study by Preqin showed.
Yes, betting the house on U.S. stocks looks dangerous as Nvidia Corp. and other technology megacaps dominate the world's largest equity market, posing an unprecedented concentration risk. At the same time, elevated Treasury yields offer a potential buffer if stocks stage a big crash.
And yet, adherents of diversification are plagued with doubt. U.S. shares remain the only game in town year after year, thanks to Corporate America's reliable profit engine. Owning anything else has been a route to underperformance.
Faber calls the last 15 years a "bear market in diversification." His $54 million Cambria Global Asset Allocation ETF (ticker GAA) has trailed the S&P 500 in all but one year since its inception despite an annualized 5% gain.
While history has instances of similar drubbings that resolved in favor of diversification, the wait has been a particularly long one this time around.
These days, financial advisers like Anthony Syracuse often find themselves having to restrain clients eager to chase the Big Tech rally given the juiced-up valuations versus the rest of the market.
"This can be an extremely difficult conversation," said Syracuse, founder of Dynamic Financial Planning. "Everyone wants to maximize their returns."
American stocks have been on a blistering run since the global financial crisis, outpacing almost everything in a period when bond returns were suppressed during the zero-rate era while international stocks languished under the weight of a strong dollar.
Up 14% annually, the S&P 500's gain is double that of stocks in developing countries and adds up to three times as large as investment-grade bonds.
