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We believe the very best tool for dealing with uncertainty is diversification. We diversify into conservative fixed income to provide stability and a rebalancing platform when equity prices rise or fall. We also diversify the equity portion of our portfolios across multiple asset classes, that is, different kinds of stocks (domestic, foreign, small, large, value, growth, etc.).
In some instances, the entire stock market can move in unison. However, that isn’t always true and different asset classes often behave differently at different times, but all have strong long-term performance characteristics.
As a recent example of diversification in action, consider the following difference in returns that even a single quarter can make:
|4th Qtr 2016||U.S.||Foreign|
|Large Company Stocks||3.8%||-0.8%|
|Large Value Stocks||8.6%||5.1%|
|Small Company Stocks||11.5%||-2.0%|
|Small Value Stocks||15.1%||1.7%|
|Real Estate Stocks||-3.2%||-8.7%|
|1st Qtr 2017|
|Large Company Stocks||6.1%||7.5%|
|Large Value Stocks||3.5%||5.9%|
|Small Company Stocks||1.0%||8.4%|
|Small Value Stocks||-1.4%||7.7%|
|Real Estate Stocks||0.8%||4.3%|
During the fourth quarter of 2016, U.S. stocks significantly outperformed foreign stocks. The very next quarter, the trend reversed and it was foreign stocks that trounced U.S. stocks. Over the long-term, the expected returns of domestic and foreign stocks are similar, but as demonstrated here, there’s a diversification benefit to owning both. The benefit of a diversified portfolio is a smoother ride and a reduction of the uncertainty that accompanies all investments.
In short, we won’t ever own enough of any one thing to make a killing, but in so doing, we won’t own enough of any one thing to get killed! If you have a reliable financial plan in place, you don’t have to make a killing to accomplish your goals. In fact the market return, which is there for the taking, is often more than enough to achieve a positive outcome to a solid financial plan.
BLOG DISCLOSURE: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Beaird Harris Wealth Management, Inc.), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Beaird Harris Wealth Management, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Beaird Harris Wealth Management, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Beaird Harris Wealth Management, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.
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