The Diversification Game (08-17-16)
Traditional investment advisors explain diversification as a building block of a solid portfolio. The age-old advice “don’t put all your eggs in one basket” is the basic principle. The goal is building a portfolio with investments that rise and fall at different times to reduce portfolio risk.
Does this process actually control risk?
What are the results and is there a better way?
Let’s take a look at what traditional investment advisors say about diversification. Fidelity discusses diversification as a way to reduce risk and celebrates diversification’s “success” during the bear market of 2008-2009. The following is directly from Fidelity’s website:
"During the 2008–2009 bear market, many different types of investments lost value to some degree at the same time. While it may have felt as though diversification failed during the downturn, it didn’t. The major asset classes were more highly correlated, but diversification still helped contain portfolio losses. Consider the performance of three hypothetical portfolios: a diversified portfolio of 70% stocks, 25% bonds, and 5% short-term investments; a 100% stock portfolio; and an all-cash portfolio."
We do not consider down 35% successful. We believe these types of losses are not what investors had in mind when pitched the benefits of diversification.
Our investment strategy and view of risk management is different. While we use multiple investments like diversified portfolios, we do not hope this will control risk. Instead our strategies proactively protect capital by moving out of falling investments and into cash. While this process does not protect against all losses, the avoidance of large losses is essential to maintain and grow your portfolio.
For more information about our unique approach to investing, please visit our Investment Services page, and remember that we are always here to answer any questions you have about how to ensure the best future for your money.