Press Your Luck

While the board moves in a seemingly random pattern now, that wasn’t the case on the original show. This was a mistake that the show producers called one of the most embarrassing moments in their careers. In 1984, Michael Larson, an ice cream truck driver from Ohio, won $110,237. The story goes that he studied past shows that he taped on VHS and would rewatch them frame by frame. Larson found that the game board used only five patterns and that each tile would only have three different types of prizes. So he knew which spaces would contain the best prizes, but also the Whammy’s. His pattern recognition allowed him to create enormous risk-free winnings.  The episode only aired once, and afterward, the producers changed the game board and added more patterns to ensure that someone else couldn’t replicate what Larson had done.  Click here to watch the video.

With U.S. stock markets closing near record highs this week many investors are wondering if they should press their luck and move more of their assets into U.S. stocks, but should they?

Investors spend countless hours staring at charts and looking at historical return data to identify patterns that will help them to earn a risk-free profit. One method is to find the best sector given what has transpired in the past or more commonly known as performance chasing or market timing, which has been proven in numerous studies to be a consistently underperforming strategy. This behavior becomes more and more observable for investors with diversified portfolios because naturally, there will be assets in your portfolio that are performing better than others. Investors see U.S. stocks markets hitting all-time highs and feel like they are missing out on what appears to be a can’t miss investment, and naturally, they want to move assets away from sectors that are underperforming or decide to take on additional risk by trading stocks for bonds. What may seem like a risk-free proposition is much more complicated, and below is a chart showing asset class performance by year for the last twenty years. Each sector is color-coded.

What this patchwork quilt of yearly sector returns demonstrates is that there is no real pattern and predicting which one sector will be the best in subsequent years is nothing more than a bet. Because of the unpredictable returns we choose to allocate our clients portfolios not by betting on patterns that don’t exist, but ensuring that we have exposures to a broad range of assets both locally within the U.S. and globally with developed and emerging markets. While investors will experience times when they wish they had more assets in the sectors that are performing best, diversification serves to ensure investors don’t land on a Whammy and potentially derail their long-term financial goals.