The fear of missing out (FOMO) on stock market gains can be a strong pull for investors, especially after years where the U.S. market knocks it out of the park.
Even when the likes of J.P. Morgan, Research Affiliates, GMO, and AQR are all forecasting higher returns on international and emerging market equities vs. the U.S., it may be tempting to give in to home country bias (if you are a U.S. investor) and load up on U.S. equities anyways.
Balancing our market expectations with our behavioral biases is difficult. But tapping into to process diversification can be a way to answer the question of how much U.S. vs. international equities asset class diversification should we have.
A systematic process can mitigate the effects of FOMO.
In this week's research note, we look at our process of generating strategic allocations by blending unconstrained optimization with an optimization assuming that closely tracking the home country benchmark is desired and see how this process fared in 2019. (PDF)
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→ THE CONVEXITY OF TREND FOLLOWING: "Trend Following should primarily be viewed as a highly statistically significant strategy, while the existence of convexity, albeit weak, should be considered a bonus feature to an investment in Trend Following." The Convexity of Trend Following