Many times, when I meet with investors I am asked ‘where is the best place to put my money?’ The financial institutions have taught investors that there is someone who can tell them what to do in every circumstance.
These institutions lead you to believe they know what you need. In fact these institutions sell you ‘product’ to feed your fear in every environment.
A true advisor will often tell you things you do not want to hear. Remember if your advisor only provides the product you ask for they are not an advisor but rather a salesperson or broker.
To succeed in investing being diversified means looking different.
Most investors are narrowly diversified into top performing funds or asset classes of the last five to ten years. They often feel diversified but aren’t.
Right now, on August 28, 2017, the top performing funds are U.S. Large Growth stocks. So, this is what financial salespeople are selling now.
To be diversified means including asset classes or types of funds in your portfolio that did poorly over the last five to ten years.
If you do this, your portfolio will look and perform very differently from your neighbors’ or friends’.
The goal of diversification is to avoid the volatility, both up and down. Right now, U.S. Large Stocks can do no wrong. However, when there is another downturn like 2001 these concentrated portfolios will suffer.
We need to smooth out the volatility. The above graphic illustrates how markets perform. There are ups and downs throughout the cycle. Our goal is to build portfolios that avoid some of the severe ups and downs.
The concentrated portfolio of US Large growth stocks is out-performing the globally diversified portfolio for now. This will change however no one can tell you when.
Of course, we must state that past performance is no indication of future results.
Many will say that ‘times have changed’. They will make a case that U.S. Large stocks will always prevail in the future.
However regular readers will know that no one can predict the future. No one can tell you which asset classes will out-perform into the future.
To succeed in investing you must own equities….globally diverisify …rebalance.