Investors need to check their arrogance every so often to ensure they’re making smart decisions, State Street Global Advisors global portfolio strategist Thomas Reif told Nest Egg.
The question, “What makes you so special?” is a critical one for investors, he explained, as even professional investors can, and do, underperform at times.
“Unless you think you have a crystal ball, ask yourself, ‘What do you know that the market doesn't know?’” Mr Reif said.
“And if professional investors, guys who have done this for a living for all of their lives, can't outperform the market consistently, ‘What is so special about the idea that you have?’
“I'm not saying it's not special, but if you're looking at individual securities or individual positions, what makes you think that you know something that isn't in the price?”
In these instances, a little “modesty check” wouldn’t go astray, he said.
“Let’s put arrogance into a little box and have a look at the decisions we're making,” Mr Reif said.
He said the market tends to get it right over the long term and questioned the strength of concentrated positions potentially informed by undue confidence.
Pointing to Australia’s “disproportionate” home bias, Mr Reif warned that investors holding 40 per cent of their portfolio in domestic assets for growth have a “big weight to financials”.
It isn’t uncommon to have this weighting, he added, but the big four banks are essentially quite similar.
“If you look long-term, aside from the occasional scandal which drops the share price, they're all lending to the same population, be that corporates or individuals, they all do kind of the same thing in the long term,” Mr Reif said.
“If you're kind of buying one bank – it might well be a high-quality bank – is that representative of what's available in the world? You might want to consider investing internationally to diversify, to get exposure to things like the tech stocks out of the US or Chinese securities.”