Importance of Diversification

Over the last 5+ years a question we often received has been “why isn’t my performance as high as the S&P 500?” OR “why am I not invested in more of the Magnificent 7 stocks.” Our reply has always been - diversification matters, chasing returns is not an effective investment strategy and we have a financial plan suited to you. 

Why does diversification matter? 

As you read this, the mainstream media is flashing red, telling you the markets are down 10% + and your investments are losing large amounts of money. While that may be true for folks who put all their eggs in one basket, that’s not the case for those who have diversified portfolios. The media fails to mention foreign markets (EFA = 8.09% YTD) or fixed income (AGG = 2.74% YTD), that are positive for the year. And why would they? They are in the business of selling ads, NOT advice. 

While staying diversified will hold you back from being solely invested in the top asset class every year, it won’t allow you to be solely invested in the worst either. The idea is to create a portfolio that maximizes return while reducing risk. 

It’s human nature to want to gain everything and lose nothing, but that’s not life. That’s why we take the approach of being diversified and doing our best to smooth out the ride. 

Why do we not chase returns?

First and foremost, if it’s already being talked about, it’s already too late. There is no way to accurately and efficiently time markets. If we chased returns and said, “let’s buy more Nvidia” (the hot stock of 2024), YTD we’d be down ~20%.

On the flip side, those funds that were used to invest in a stock or sector that was “hot” were at the same time, not being invested in a stock or sector that was “down” that could have been bought “on sale”.

Why do we stick to our financial plan?

Nobody knows what will happen in the market any given day, month, year, etc. The only things we can control are how much we spend; how much we save, and the timing around our goals. Over the long term, if we stick to our plans, remain diversified, and not veer off course, we can forecast based off history, that you can achieve your goals. While that may sound boring, it’s the most efficient way.