Wealth Management Blog

Posts tagged Diversification

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.

Ever Wonder What “Really” Happens in the Markets?

By JJ Burns

February 10, 2015

The first 5 weeks of the New Year have been pretty volatile for most markets; clearly, last year’s news has brought volatility back.  Many strategists have been “pounding the table” on stocks and declaring that the Large Cap US Equity Market will continue to lead the way in 2015.  Although possible, we believe that broad diversification is still the key to long-term success.  This philosophy means we will continue to have exposure to small cap, mid cap and international securities, even though they trailed US Large Cap equities last year.  We just received an interesting piece from Louis Navellier of Navellier & Associates.  A long-time market analyst and portfolio manager, he notes:

The biggest news last week was crude oil rallying 19% from its lows in just four days, which sparked a big rally in some beaten-down energy stocks and other stocks that have been beaten down by a strong U.S. dollar. By Friday, most major market indexes had made up for all of January's declines. But here is the real conundrum the stock market now faces…of the 20 stocks that account for approximately 30% of the S&P 500's total value, too many — like Caterpillar, Chevron, Coca-Cola, DuPont, ExxonMobil, IBM, McDonalds, Microsoft, General Electric, Goldman Sachs, JPMorgan & Co, Pfizer, Procter & Gamble, and even Google have all missed analyst estimates and/or issued cautious guidance below analyst estimates… essentially what is happening is that a strong U.S. dollar is squelching sales of large multinational companies and squeezing their underlying earnings. A massive flight to more domestic stocks with real sales and earnings growth is now underway, so I expect the stock market will get increasingly narrow in the upcoming weeks.

Since the brief U.S. market correction last fall, investors have had to adjust to new information and possibly reposition portfolios with respect to:

  1. The increasing strength of the U.S. dollar
  2. A precipitous decline in crude-oil prices and gasoline, followed by a brief but sharp rally in 2015
  3. Changes in European Central Bank policy that are expected to lead to expansionary moves similar to those taken by the U.S. Federal Reserve Open Market Committee following the financial crisis.
  4. A repricing of some commodities that react to changes in inflation expectations and the dollar such as gold.

Navellier also noted that the previous time a ‘leadership change’ occurred in the U.S. markets was a mega-cap retreat in the early 2000s following the Tech Bubble.  He goes on to say:

The S&P 500 has gotten too top-heavy once again…the bottom line is that we are now unquestionably in an increasingly narrow stock picking market, and the "sweet spot" in the stock market is moving down the capitalization ladder to the mid-capitalization area.

Time will tell if this analysis is correct.  However, we agree with the thesis, and think this is a good time for rethinking exposure to international stocks as well, which might expect a boost in revenues and favorable exchange rates against the U.S. dollar.   The best news, however, is that many of our clients are in portfolios that are diversified across the U.S. market-cap spectrum (including mid- and small-cap stocks), and have international exposure as well.  We appreciate that 2014 was a trying year for many investors, but we’re pleased that we already have many of the security exposures that might prevail going forward.  For more on the markets over the last two years and how some investors fared, please see our 2014 year-end review.