In the 1960s comedy TV series “Get Smart,” Maxwell Smart (a.k.a. Agent 86) and his partner (Agent 99 whose name was never revealed) worked for an organization named CONTROL, a secret U.S. government counterintelligence agency battling against KAOS, the international organization of evil. While Smart always succeeds in thwarting KAOS, his incompetence and insistence on doing things by the book complicate everything. (Think of Maxwell Smart as James Bond and Inspector Clouseau wrapped into one person!)

Investors today have their own battle against chaos (not KAOS). Chaos takes on many identities – the sudden shift in tech stock sentiment, prospect of AI taking over the software industry, cumulative effect of inflation, pressure in private credit markets, employment challenges and housing costs, to name a few. Suddenly, the environment has shifted away from the enthusiasm of tech. Adapting to this new direction and magnitude introduces elevated volatility and – yes – more chaos.

Have you noticed there is a comfort food section in the stock market? Sectors such as tech, finance and consumer discretionary goods are down year-to-date, while more stoic sectors like consumer staples, energy, materials and industrials are already up double digits. Some of this has been brewing for a while and largely unnoticed. Industrials, energy and materials sectors all have higher one-year returns than the tech sector. There has been so much media around tech and AI that investors are often surprised to learn the communication sector has a better three-year return than tech, and the energy sector has a better five-year return.

You may have guessed that this is my lead-in to the benefits of diversification. Sure, the Magnificent 7 provided great returns over the last few years – but even the Bloomberg Magnificent 7 index is down 6.5% year to date. Human nature tends to want more of a good thing, fueling the process we mentioned in our annual outlook: excessive optimism leads to speculation which leads to leverage which leads to fear of missing out which leads to an eventual disconnect from economic reality (a bubble).

For investment providers, the approach is to take a long-term view toward building a durable portfolio that delivers a respectable outcome aimed at meeting our clients’ ultimate goals. When investors review the performance of the investment provider, their main question tends to be, “What have you done for me lately?” These two perspectives stand in contrast to each other. Doing well in the moment requires continual rotation into the winning short-term theme, while subjecting the portfolio to timing risks that ultimately end up hurting long-term results. At the other end of the spectrum, a durable long-term portfolio will capture a portion of the go-go short-term trends, but in a smaller magnitude – making it appear that the investment provider is not doing a good job in the moment. A diversified portfolio is never the best performer at any given moment, but it is never the worst.

As we navigate an asset allocation path through this current chaos, there are a growing number of considerations along the road to long-term client success. We are humble enough to know that nobody can predict the future, so our process of adjusting allocations slowly works well in a volatile market. We call this process, “Walk, don’t run.” If our allocation is working, we continue walking in that direction. If it is not working, we begin looking for a better path.

Thank you for your business and confidence in Bell!

Greg Sweeney is the Chief Investment and Economic Strategist at Bell Institutional Investment Management. He guides the investment strategy, and this outlook is his perspective on the latest market trends and what they could mean for investors. Any views, strategies or products discussed in this article may not be appropriate or suitable for all individuals and are subject to risks.