Given the outstanding 2014 returns for U.S. large stocks, many investors are considering moving all their money into this hot asset class. Thereby avoiding U.S. small stocks, international stocks and emerging market stocks, including fixed income.
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. Part of the issue is that gamblers need to brag to their friends about how well they did. They naturally forget the losses.
In markets like these 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. Most 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 some large pension funds.
Since most investors will be retired a long time. They need to invest for the long term which can be 20 to 30 to 40 to even 50 years. Many investors have a hard time thinking is such long terms. Even if you look at a 10 year period a diversified portfolio will in most cases prevail.
Over time these portfolios will help you successfully accomplish your investment and retirement goals.
To succeed in investing you must own equities….globally diversify…..rebalance.
Please email any questions or comments and I will personally respond appropriately.