If you read our previous piece, Unicorns and Gurus, you learned that there’s virtually no way for you to get to the market quicker than the news you hear from various media sources. If that made you feel a little helpless, not to worry. That lightning-quick response time can be an inefficiency for the market. And inefficiencies are something investors can definitely take advantage of.
DIVERSIFY YOUR TROUBLES (NEARLY) AWAY
Among your most important financial friends is diversification. You’ll call on your old pal diversification to simultaneously dampen your exposure to a number of investment risks while potentially improving your overall expected returns.
Nice guy, that diversification.
And this is no imaginary, fairweather friend. The benefits of diversification have been well-documented and widely explained by some 60 years of academic inquiry. Its powers are both evidence-based and robust.
THE BEST OF BOTH
What is diversification? In a general sense, it’s about spreading your risks around. But, it’s more than just ensuring you have a bunch of holdings. It’s also about having many different kinds of holdings.
When the price of eggs tanks, it doesn’t matter that you’ve got eggs from Idaho and eggs from Switzerland.
You’ve heard the old adage, “Don’t put all your eggs in one basket.” That’s true with investments also. But there’s an addendum to the adage, “You’d better have baskets of fruit, grain, automobiles, oil, microchips, and hydroelectric power to go along with all your eggs.”
While this may make intuitive sense, many investors believe they are well-diversified when they are not. They may own a large number of stocks or stock funds across numerous accounts. But upon closer analysis, the bulk of their holdings are concentrated in large-company U.S. stocks.
Here’s what happens when you lack diversification:
- Your vulnerability to specific, avoidable risks is increased.
- It creates a bumpier, less reliable overall investment experience.
- You become more susceptible to second-guessing your investment decisions.
Combined, these three strikes tend to generate unnecessary costs, lowered expected returns and, perhaps most important of all, increased anxiety. With that working against you, you’ll be back to trying to outwit the market instead of going along for the ride.
A RAINBOW BEYOND THE...RAINBOW
There’s a plethora, a virtual cornucopia, of investment opportunities available today in the form of tightly managed mutual funds intentionally designed to facilitate meaningful diversification. They offer efficient, low-cost exposure to capital markets found all around the globe.
Basically, there’s no excuse not to diversify.
To best capture the full benefits that global diversification has to offer, we advise turning to the sorts of fund managers who focus their energies – and yours – on efficiently capturing diversified dimensions of global returns.
Those managers bent on timing the market are likely just wasting their time and your money. Even if it’s diversified news-chasing, it’s unlikely that the extra effort, cost and technological hurdles will be overcome in a profitable manner.
Why do all that when you could simply diversify and have your eggs and eat them too? Just don’t forget that basket of hydroelectric power.
Read More from Atlas Wealth Advisors
Disclosure requirement: "Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses."
