Here's Your Portfolio's Best Defense in a Recession
Last year, Warren Buffett said he would bet on "monkeys throwing darts at the page" over financial advisors and Wall Street when it comes to making money. As funny as it sounds, an experiment by Research Affiliates had already proved it to be true a decade earlier. It shouldn't be that surprising: A 2022 report showed active managers focused on beating the S&P 500 index have trailed that benchmark for 12 straight years.
In the experiment, the key to outperformance was in the method itself. The company randomly chose portfolios of thirty equally weighted stocks from a 1,000-stock universe. After doing this for every year from 1964 to 2010, they realized that 98% of the portfolios had beaten a market capitalization-weighted index of those 1,000 stocks. The secret was diversification. (More on that in a bit.)
Heading into the recession in 2001, experts convened by the Federal Reserve Bank of Philadelphia expected an average of 3.2% real gross domestic product (GDP) growth over the next four quarters. Similarly, just as the Great Recession was beginning at the end of 2007, that same panel believed the coming four quarters would deliver 2.2% real GDP growth. Neither forecast was even close.
Source Fool.com
