“Diversification Is Your Buddy!”

I continue to believe that many investors have not gotten over the 2008 housing crisis. They want to avoid the stock market at all costs. Many rationalize that the market has been going up for a long time. And now is the time to get out.

 

Since no one can predict the future, this is a huge mistake.

 

You must decide if you are a gambler/speculator or an investor. Gamblers believe they can out guess the market and avoid all losses. The gamblers have proven numerous times to be wrong in the long run. One may get ‘lucky’ but no one can consistently market time.

 

We must ask ourselves why are crashes of the past seen as buying opportunities and crashes of the future are seen as risk?

 

Keep in mind since 1926 the U.S. equity markets have earned nearly 10% during which time there have been downturns of 10% or more 89 times. And the average recovery since 1946 has been 111 days.

 

In markets like these and all markets diversification is your buddy.

 

Proper diversification spreads risk across various asset classes with varying return characteristics or dissimilar price movement.

 

Simply said: they don’t do the same thing at the same time.

 

A truly diversified portfolio will under perform a strong US large stock market. This was the case in the late 1990’s only to experience the tech bubble crash. The globally diversified portfolio continued to earn a return. Of course, past performance is no indication of future results.

 

Right now many investors are narrowly diversified into top performing funds or classes of the last five to ten years. They often feel diversified but aren’t. To be diversified means including 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’.

 

Those of you which are my clients, own portfolios which are professionally diversified and rebalanced much like the large pension funds.

 

Over time these portfolios will help you successfully accomplish your investment goals.

 

Remember the equity markets provide the greatest wealth creation tool on the planet. If the portfolios are properly constructed and maintained.

 

To succeed in investing you must own equities….globally diversify…..rebalance.

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