Which I More Important Diversification or Discipline? Both

Just recently I read that Warren Buffet’s net worth has surpassed $100 billion. He is considered one of the best investors ever…long-term. Mr. Buffet is also considered a value investor. In that he buys companies that are underpriced for a variety of reasons.

One thing you can count Mr. Buffet for is discipline. Although I do not agree with the fact that he is not diversified. I do agree with his discipline.

During the dot.com era of the 1990s his fund underperformed the U.S. equity market by a relatively large margin. In fact, in 1999 the S&P 500 earning nearly 30% Mr. Buffet’s fund lost 15% as did many value and small stocks. He did not waver from his approach. He is quoted as saying I continue to believe in bricks and mortar companies.

Over the past few years we have experienced the value sector underperforming U.S equities as a whole. Will the 1999 to 2000 change repeat I do not know? Although value and small stocks appear to be making a comeback.

What I do know is diversification and discipline work long term!!

Some investors are considering moving their money out of the stock market. Because the markets are at all-time highs. The market has to go down because it is at an all-time high.

Conversely, many investors want to be concentrated in the S&P500 because it is the best performing.

Since no one can predict the future, both are 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.

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.

Let’s consider the current situation. The S&P 500 is the best performing asset class in the longest running bull market in the U.S. stock market history.

Perhaps a look at the history of the market from 1970 to 2017. The S&P 500 was the best performing asset class once while being the worst performing asset class 14 times in annual performance. It bears repeating no one can consistently predict the equity markets.

Because we know that the equity markets are random and unpredictable.

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’.

There will always be something in a truly diversified portfolio that you will not like. This will be true every year.

It seems every day I am asked what will the market do today or this week or this year?  Or what stock will do best? Or can you beat the market? Or is now a good time to buy into the market? Or is now a good time to sell?

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.

There will always be someone touting a ‘new’ strategy that will protect or insulate you from the current risks. These Wall Street bullies want you to believe they can predict the future and earn you stock market returns with Treasury bill risk. What you end up with is Treasury bill returns and stock market risk.

Find an investor coach/fiduciary adviser who will help you build a prudent portfolio designed for you. And more importantly keep you disciplined during both up and down markets.

Process and discipline will lead to a successful outcome.

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

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