Wealth Management Blog

Posts published in March 2018

Don’t Put All Your Eggs in One Basket – The Principle of Diversification

By JJ Burns

March 29, 2018

Last night as I went out to my chicken coop to collect eggs for Easter (see picture below), I was reminded of the age-old lesson: don’t put all your eggs in one basket. This principle serves as the core foundation upon which we build long-term investment plans for our clients.

At heart, we’re all little kids. Our big hearts tell us to run out to the coop, fill up our baskets with as many eggs as we can possibly fit. Then we run back inside to count our eggs. We hope we’re the best and that we have more than our siblings. We make grand plans for how we will color them, where we’ll hide them or what we will trade them for.

But what happens to my little 9-year-old “mermaid” Caroline, who in all her excitement, running back to the house, drops her basket and all her eggs go crashing to the ground? She has lost almost everything! While some may be salvageable, the others are permanently gone. Worse yet, she is emotionally scarred by the experience, vowing never to make that mistake again. But when next year comes around, will she remember the lesson of Easter 2018? Or in her exuberance, will she be doomed to make the same mistake again?

Fortunately for Caroline, she has parents who are there to help her, to teach her, to coach her and to guide her. Her parents have learned the principle: don’t put all your eggs in one basket. We spend time teaching her how many baskets to have, how many eggs she should have in each basket, how some eggs might be better than others, which chickens to choose from, and how many trips to make. We teach her the value of those eggs, what she needs to do to protect them, and what she can do with them.

When it comes to investing, for many investors regardless of how old we are, our age-old wiring is very similar to my precious Caroline. We either put all our eggs in one basket, or we don’t choose the right basket, or we don’t choose the right eggs, or some combination of all of the above. We are each wired a little differently when it comes to how risky we want to be with our proverbial eggs. This is why our baskets might be balanced differently, yet the principles still remain the same.

The foundational principle for a sound long-term investment plan is DIVERSIFICATION. There are many reasons why we diversify. In light of what we’ve shared about volatility in recent weeks, one of the key benefits of diversification is that it makes for a smoother ride on your path to achieving your goals. A well-diversified portfolio can provide the opportunity for a more stable outcome than a single security.

Put even more broadly, a well-diversified portfolio can provide for a more stable outcome than a single asset class.

A disciplined approach built on foundational principles of investing can provide for a more stable outcome. It’s the best defense and offense we have to help investors ride out the inevitable emotional ups and downs on your path to achieving your most important life goals. It may not feel as good as we’d like at times, but it’s a lot better than the alternative.

So, as you go about collecting your eggs this Easter holiday weekend, remember: don’t put all your eggs in one basket. Or as Barry Goldberg, our Director of Business Development likes to say, “Don’t put all your matzah balls in one bowl!”

From our family to yours, we want to wish you a Happy Easter and a Happy Passover. We are grateful for the work that we do in helping families like you live more confidently and securely. Thank you.

Turmoil Sells

By JJ Burns

March 23, 2018

Tariffs, trade wars, interest rate hikes, the Facebook data scandal, the omnibus spending bill…Today’s headlines are filled with market turmoil and it appears that everyone is tuning in. The question many investors are asking is “Should I be concerned and if so what should I do about it?”

The market is volatile, there’s no doubt about that. Volatility is normal, it is to be expected. The challenge that many investors face is that they are bombarded on all fronts by stories, opinions and so called expert recommendations. In today's on-demand era, “wait and see” can be a frustrating tactic. Yet consider it this way: Markets discount widely-known information. Expectations for $60 billion in tariffs and corresponding retaliation from China are probably baked into prices now. If Thursday’s volatility is any guide, investors are generally unhappy with this possibility. But as markets look forward, they move most on the gap between expectations and reality. Compared to what people evidently fear today, even watered-down tariffs would be a positive surprise. Heck, even simple math might be a positive surprise: $60 billion amounts to just 2% of total 2017 imports. That’s not a lot. If China retaliates in kind, they would apply further tariffs to just 2.6% of the US’s total 2017 exports which is also not a lot. Seems to us like there is a lot of room for negative sentiment to catch up to a more benign reality.

Most people are long term investors who are targeting a specific rate of return based on their individual goals. What people often forget is that when targeting an annualized rate of return you will have vast differences in year over year returns. In fact, there are few years when either stocks or bonds delivered returns that are even close to the market averages.

To illustrate this point, between 1926 to 2016 the annualized return for U.S. stocks was 10.16%. During that time returns fell within 2 percentage points of the annualized return of 10.16% in only 6 of the 91 years.

When considering the U.S. bond market, between 1926 to 2016 the annualized return for the U.S. bond market was 5.37%. During that time returns fell within 2 percentage points of the annualized return of 5.37% in 24 out of 91 years.

Financial markets, particularly stocks are inherently volatile over the short term, as we are once again experiencing.

When we understand, and come to peace with this data, we can begin to understand equity volatility as a positive phenomenon, and in fact the reason for the premium return from equities. The term “volatility” refers to the relatively large and unpredictable movements of the equity market, both above and below its permanent uptrend line. Equities can, and frequently are, up over 20% one year and down 20% the next, and vice versa. However, if we accept that the long run returns of equities will approximate the past return, we begin to understand that these periods of downside volatility must likewise at some point be corrected by a period of upside volatility, greater than the long-term average of roughly 10% per year.

The premium returns of equities are, therefore, the efficient market’s way of pricing in adequate compensation for tolerating such unpredictability. Volatility is the reason equity investors are rewarded over time with premium returns, as long as we have the emotional strength to live through it. Volatility is not to be survived, it is to be embraced and thrived upon.

You Have a Plan

The very best investors have a disciplined approach to making portfolio decisions, and always stick to their plan, no matter what the rest of the world is doing. They are able to live through the peaks of euphoria, as well as the depths of terror, with a healthy understanding that a well-designed written investment and financial plan will get them through both.

No predictions. No witch doctor investment sorcery or magic investing formulas. No “Black Boxes.” Just hard work, patience and discipline.