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?
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- 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.
- 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.
- 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.
- 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.
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- 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.
- Compartmentalizing –
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- 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
