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For investing success, look to the cockroach Add to ...

Dylan Grice has found an interesting way to sign off from Société Générale. The strategist – known for a bearish disposition -- is leaving the European financial services group after three years there. In his final note (via FT Alphaville), he appears to celebrate the futility of trying to beat the market, using the analogy of the cockroach.

Or, as he puts it, “there are few more accomplished species on earth than the lowly cockroach,” which is why smart investors should turn to them for inspiration. Lowly cockroaches, he said, wouldn’t bother trying to figure out when it is best to switch from bonds to stocks, and from stocks to bonds.

“A cockroach would avoid playing the game in the first place,” he said. “He’d accept that he wasn’t clever enough to know when to switch out of one asset class and into another. He’d probably do everything he could to avoid having to make such horrible decisions. He’d buy bonds and equities together, ensuring that each year he held them in equal proportion.”

Indeed, he constructs three hypothetical portfolios, in chart form: The S&P 500, bonds, and a “cockroach” portfolio that is comprised of 50 per cent stocks and 50 per cent bonds, rebalanced annually. Since the 1990s, the cockroach portfolio would have outperformed bonds. And while it would have only matched the S&P 500, it would have done so with far less volatility, missing the tech crash and the 2008 financial crisis.

Cockroaches, it seems, can give investors a very smooth ride, with strong returns. Mr. Grice also used this approach over the longer term. Since 1970, the cockroach portfolio would have beaten bonds but lagged the S&P 500 slightly – but again, with a far more consistent ride that wouldn’t have been prone to brief spikes and selloffs.

If this approach sounds familiar, that’s because it resembles the Couch Potato portfolio popularized by columnist Scott Burns and hailed by publications like MoneySense magazine.

The idea here is that successful investors don’t have to be particularly knowledgeable about financial matters and they don’t have to dodge financial crises and market meltdowns: They simply distribute their money among low-cost exchange traded funds and bonds, with a target asset allocation – say, 60 per cent stocks and 40 per cent bonds. Then, rebalance every year.

It makes a lot of sense, especially for people with a limited amount of time to devote to their investments. Nonetheless, it is fascinating that a strategist – whose peers try to time market moves in an effort to outperform major benchmarks – would provide such simple, passive advice.

“Of course, if you’d been clever (or lucky) you’d have owned equities in the 1990s and bonds in the 2000s. You’d have switched out at the top. But how many did?” Mr. Grice said. “For the overwhelming majority, timing these events is a mug’s game.”

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