This week we will continue our discussion on staying calm and carrying on, or the case for staying put in volatile markets. When things get crazy, it is often helpful to take a moment to recalibrate and simplify, and that is what we are going to focus on this week - getting back to the basics. Now, some of this will be familiar from our April blogs on the principles and practices of smart investing but there is no more important moment than now to start employing this approach. And these are the basics - faith, patience, and discipline and asset allocation, diversification, and rebalancing. So, here we go!
No investor looks at turbulent markets and thinks, “Wow is this fun!”, not even Warren Buffett. It’s easy to get pessimistic during times like this. In fact, the most recent AAII Investor Sentiment Survey showed that less than 20% of survey respondents are “bullish”. With market anxiety as pervasive as it is, we are hearing a lot of “is it time to get out” comments from the talking heads. In a word, the answer is no! So today, we will talk about diversification.
In sticking with catchphrases and cliches, if you haven’t “put all your eggs in one basket”, chances are diversification is a strategy in your portfolio. So when things get rough and different sectors and industries react differently, the most affected holdings you may have can be offset by the holdings that are less affected.
While the current sell-off has resulted in a decline in both stocks and core bonds, even a very simply diversified portfolio can offer some protection. As an example, a basic diversified portfolio with 60% in MSCI World equities and 40% in Global Aggregate Bond Index has done well. At their worst point in January, global stocks were down -8%; the diversified portfolio was down only -6% which you can see in the chart below.
Diversification is all about buffering your exposure to the risk of market volatility. But it’s important to note that if your portfolio is diversified and contains some fixed income, you may not keep up with an all-equity portfolio when things start getting better. By helping you avoid the full brunt of market downturns, diversification has historically helped a portfolio’s value recover sooner, and it smooths out the ride along the way. Given that investors are human, and humans are emotional little things, this has more value than you might think.
Next week, we will talk about self-sabotage and timing the markets.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Source: (18 February 2022). The case for (always) staying invested. JP Morgan. Retrieved 19 May 2022.