Cup of Joe

Markets in October

A teammate of mine recently posed a simple question, “Why not just put everything [in a 401K account] in one fund, like the S&P 500 Index?”  The simple answer is Diversification.  But what does that mean for investing?  Diversification for what purpose?

• 1. Risk – By spreading your investments across multiple asset classes, you ensure that you are not only exposed to a single one that tanks. A good example of this is tech stocks back in 2022 when that sector was -35% in 2022 compared to the S&P 500’s -18.  Investing in multiple things helps limit the impact on your portfolio when we experience big downturns.
  2. Capturing return – No single asset class does the best every year. By diversifying, you are casting a wider net to capture the different asset classes that become top performers.
  3. Steady growth, smoother path – A portfolio allocated across several different assets classes by definition exhibits less volatility than you would experience moving between different single asset classes.

Diversification also plays a mental role.  It helps improve your experience, which not only increases the chances that you actually accomplish it, but can also make it more rewarding.

1. Diversification is an emotional regulator. By spreading out the performance risk, you avoid the effects of highs and lows, which can add a lot of unnecessary anxiety.

• 1. • It also fends of the feelings of strong FOMO.  When you own just one thing and you see another thing do better, you now want that.  Problem here is that it’s a never ending cycle and you’re likely seldomly happy with the results.  Diversification works against that.
  2. Compartmentalizing –

• 1. • Can think about it based on time frame – 30% bonds is my under-five year money; 70% is my 10 year money.
     • Can think of it based on risk.  “Ok, 40% of my portfolio is only expected to fluctuate 3-7%. I can handle that. So I’m ok if the other 60% fluctuates more than that because there’s higher upside potential there, and I’ve assigned a longer time frame to that money.”

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Securities offered through Osaic Wealth, Inc. Member FINRA/SIPC. Advisory Services offered through Osaic Advisory Services, LLC (Osaic Advisory). Osaic Wealth and Osaic Advisory are separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth and Osaic Advisory.

By: Joe Gallemore, CIMA®, CExP™

Partner & Director of Investment Management