If you’ve had a chance to look over the investment philosophies on our website, you’ll remember seeing seven principles that we stick to when implementing and monitoring an investment portfolio. If you haven’t seen them, here is the link: https://www.albitzmiloe.com/philosophy/.
In this article, I want to highlight our third philosophy, and quite possibly the most applicable to the start of 2020:
Portfolio Diversification Works.
There are many ways to diversify a portfolio. For example, an investor can have several holdings, such as stocks, bonds, precious metals, commodities, currencies, and other alternative investments. Stocks can be different sizes and come from various sectors of the economy in different parts of the world. Funds can have multiple managers with different strategies and can cover a wide range of indexes. Diversification can vary depending on the size of an accountant and the specific goals of the investor. In this article, I want to look at three extremely simple strategies that we use to diversify portfolios as we push forward in 2020 and continue to see new highs in the stock market.
- Have a balanced mix of investments within your portfolio.
Like I said, pretty simple. It’s always smart to stay diversified with different holdings in your portfolio that aren’t perfectly correlated. And where we are in the stock market now especially seems like a good time for balance. When markets are expensive, deficits are large, and leverage is high, there is more vulnerability in the system than usual. A sudden spike in oil, or an unexpected military conflict, or an unexpected election outcome, can have a big impact on the economy and stock market in such a tight financial situation.
This is why investing with a margin of safety and maintaining diversification among asset classes is of particular importance during times like this. When one asset class is consistently outperforming most others, and you start to question whether you even need those other asset classes at all, that’s exactly when they tend to become important. When one thing starts to work for a while, investors naturally pile into it, and they get every bit out of it until there’s simply not much more it can do. However, that behavior is what leaves opportunities elsewhere to be found by investors that are willing to look out in the long-term. So, make sure your portfolio has a balance of assets and asset classes.
- Limit the concentration of a single position or asset class within your portfolio.
Pretty self-explanatory. This is a situation that comes up often with inherited stock, company stock options, or successful long-term stock pick. As an investor, it’s extremely risky to have a large portion of your portfolio in a single position. Unless there is total conviction in an extremely well-researched company AND the high risk is in line with your investing goals, it is best to sell large positions and invest in multiple assets.
- Make sure your equity-to-fixed income allocation is fitting for your time horizon and risk tolerance.
Every investor has a time horizon for investment. It may be six months, two years, five years, or 10+. An investor looking to fund their child’s college education next year should not be invested the same as an investor who isn’t looking to touch the funds for several decades. The same goes when comparing an investor who simply can’t handle a 10% drop in their portfolio versus an investor who has experienced multiple 20% drops and managed to stay invested and ride out the cycles. These factors should help guide you to about how much equity, or stocks you have and how much fixed income, or bonds you have in your portfolio. The last thing you want is to be too aggressive with an all stock portfolio if you can’t afford or aren’t willing to see a drop in your portfolio. This is the importance of portfolio diversification.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. A diversified portfolio does not assure a profit or protect against loss in a declining market.