The Only Rational Deployment of Our Ignorance

By Ben Carlson

Ritholtz Wealth Management is a Registered Investment Adviser. This presentation is solely for informational purposes. Advisory services are only offered to clients or prospective
clients where Ritholtz Wealth Management and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing
involves risk and possible loss of principal capital. No advice may be rendered by Ritholtz Wealth Management unless a client service agreement is in place.
Diversification Lessons From The Wire
“The game beyond the game.”

Source: The Wisdom of Finance by Mihir Desai

Why We Invest
Protecting Your Purchasing Power
1979 1999 2019

$4.03 $6.17 $9.26

$9,899 $17,701 $35,830

$62,900 $161,000 $317,800

Source for average movie ticket: Box Office Mojo and The Hollywood Reporter.
Source for 4-year college required annual tuition, fees, room and board: National Center for Education Statistics and CNBC.
Source for U.S. median sales price for new homes sold: United States Census Bureau
When Inflation Cuts Money in Half
35 Years

23 Years

17 Years
14 Years
12

2% 3% 4% 5% 6%

Inflation Rate

For illustrative purposes only.

The Long-Term
(1928-2019)
The Long-Term with Inflation
(1928-2019)
 Stocks, Bonds and Cash: 1928-2019
60.00%
52.6%

40.00%
32.8%

20.00%
14.0%
9.7%
4.9% 3.4%
0.00% 0.0%

-11.1%
-20.00%

-40.00%
-43.8%

-60.00%
Stocks Bonds Cash
 Stocks
Annual Stock Market Returns, 1928-2019
60%

40%

20%

0%

-20%

-40%

S&P 500
Source: NYU
-60%
 Bonds
Annual Bond Market Returns, 1928-2019
60%

40%

20%

0%

-20%

-40%

10 Year Treasuries
Source: NYU
-60%
 Cash
Annual Cash Returns, 1928-2019
60%

40%

20%

0%

-20%

-40%

3 Month T-Bills
Source: NYU
-60%
 Why Not Just
Invest in Stocks?
Asset Classes by Decade
 Stocks Were Down 25
out of the Past 92 Years
The Role of Bonds In Your Portfolio
30%

20%

10% Stocks Bonds

0%

-10%

-20%

-30%

-40%

-50%

9 29 930 931 932 934 937 939 940 941 946 953 957 962 966 969 973 974 977 981 990 000 001 002 008 018
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2
How to Think About Risk
Shark Week
Stop Looking So Much
What is Risk?
 Deep Risk vs. Shallow Risk

“Risk, then, comes in two flavors: “shallow risk,” a loss of real capital that recovers relatively
quickly, say within several years; and “deep risk,” a permanent loss of real capital.
Put into different words, shallow risk, if handled properly, deprives you only of sleep for a
while; deep risk deprives you of sustenance.”

-William Bernstein
 Your True Risk

(1) Am I on track to achieve my financial goals?

(2) How do I minimize the risk of not achieving my

financial goals?
The Investor Lifecycle
 How Does
Diversification Work?
Modern Portfolio Theory

Source: The Wisdom of Finance by Mihir Desai

An Illustration of Diversification

Chart from J.P. Morgan Asset Management. Large cap: S&P 500, Small cap: Russell 2000, EM Equity: MSCI EME, DM Equity: MSCI EAFE, Comdty: Bloomberg
Commodity Index, High Yield: Barclays Global HY Index, Fixed Income: Barclays US Aggregate, REITs: NAREIT Equity REIT Index, Cash: Bloomberg Barclays 1-3m
Treasury. The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME,
25% in the Barclays US Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the
NAREIT Equity REIT Index.
The Magic Of Diversification

Chart from J.P. Morgan Asset Management. Large cap: S&P 500, Small cap: Russell 2000, EM Equity: MSCI EME, DM Equity: MSCI EAFE, Comdty: Bloomberg
Commodity Index, High Yield: Barclays Global HY Index, Fixed Income: Barclays US Aggregate, REITs: NAREIT Equity REIT Index, Cash: Bloomberg Barclays 1-3m
Treasury. The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME,
25% in the Barclays US Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the
NAREIT Equity REIT Index.
The Magic Of Diversification

Chart from J.P. Morgan Asset Management. Large cap: S&P 500, Small cap: Russell 2000, EM Equity: MSCI EME, DM Equity: MSCI EAFE, Comdty: Bloomberg
Commodity Index, High Yield: Barclays Global HY Index, Fixed Income: Barclays US Aggregate, REITs: NAREIT Equity REIT Index, Cash: Bloomberg Barclays 1-3m
Treasury. The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME,
25% in the Barclays US Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the
NAREIT Equity REIT Index.
 The Lost Decade: 2000-2009
192.1%
175.6%
162.0%

82.0% 84.8%

41.3%

17.0%

-9.1%
0 ks ap s x ts Ts e
50 c d de ke I lu
P o lC on In r E a
St al tB
a R V
S& d M ap
ig
n Sm o v
B
on
in
g
lC
e S rG al
or U a S er
g
F
Ye
U
m Sm
5 E S
U
Performance data represents past performance and does not predict future performance. Indices not available for direct investment. Performance does not reflect the expenses
associated with the management of an actual portfolio.
After The Lost Decade: 2010-2019
256.7%

205.8%
198.9%

176.2%

79.0%

44.5% 48.6%
37.5%

Performance data represents past performance and does not predict future performance. Indices not available for direct investment. Performance does not reflect the expenses
associated with the management of an actual portfolio.
Diversifying Across Time
S&P 500 2020 Returns by Week End
40% 39%

35%

30% 29%
26%
25%

20% 18%
15%
15% 13%13%
11% 12%
10% 9% 8% 9%
8%
5%
5%

0%
0% 0%
-1% Source: YCharts
-2%
-5% -3% -3% -4%
-5%

-10%
 Questions to Ask
Before Diversifying
• What are my financial goals?
• When do I need this money?
• What is my willingness, ability & need to take risk?
• How complicated is my financial life?
• How do focus on what I can control?
Where to Find Me
Questions?