Diversification without Discipline is Just Guessing

A key component to building a portfolio is using diversification which reduces your risk/volatility. This is very important when you are approaching retirement because of the potential damage volatility can do to a well planned retirement strategy.

The challenge is, when creating a diversified portfolio, some of your investments will be on the rise while others seem destined to never achieve any level of success. Because market cycles and economic cycles are so unpredictable, this may continue for months or years.

Over time, it is only natural to want to sell off the losers and buy more of those winners. When you finally decide to make that trade, it is almost always too late in the cycle. A few weeks or months later, all those winners you kept become losers and the losers you sold start hitting their all time highs.

This may sound like a bit of an exaggeration but I am sure everyone reading this blog has had this experience.

When you commit to a diversified portfolio, sometimes it requires a strong stomach and good constitution to ride through the tough times.

Why should we worry about this?

The chart below compares the annual return for four different asset classes over different periods of time in the market.

During the period 2002-2007, the Small Cap Value index beat all other indexes by a significant amount on average.   This was followed by a strong run up in Large Cap Growth Stocks during the period 2008 -2015.   Then back to Small Cap Value.

Markets move in cycles, trends occur but we never know for how long and when they will change. These differences are even larger when we start adding in other asset classes in the U.S. and globally.

It takes discipline to stay invested and diversified. Retirement is a long time. Don’t get caught out of balance.

The right diversified model is different for everyone. Make sure that your overall investment strategy is based on your goals not just as a response to temporary market cycles which can and will change over time.

Create a plan, build a portfolio to match your plan and stay disciplined. Success doesn’t happen by accident.

My best, Mark