Diversification is a popular buzzword, but what does it actually mean? John joins Payne Capital Management Chief Investment Officer Bob Payne to discuss.
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The Bass Lines:
Is Your Portfolio Really Diversified?
- [00:45] – Lots of folks in the financial industry talk a big game about being diversified, but they’re often mistaken. There’s even one show on CNBC that has a segment on diversification. It suggests that if you have five stocks from five industry sectors then you’re diversified. What a load of bologna. You might’ve been told you were diversified, but you’d have to dig into your portfolio to discover whether that was truly the case. Everyone talks about the S&P 500, but they’re more than 500 stocks that are publicly traded. In fact, they’re more than 12,000 publicly traded companies around the world. And let’s not forget the bond market. The bond market has all sorts of bonds you can invest in as well, so when you say you’re diversified because you own a couple of bonds and mutual funds, there’s a good chance that’s not actually the case.
What Is True Diversification?
- [3:35] – Think of four legs on a stool. You have to have all four legs to hold up the stool. Likewise, you must invest in these four areas to be truly diversified. These four legs consist of bonds, U.S. and international stocks, income-generating real estate, and hard assets like commodities. Within those areas, you need to be diversified across asset classes and within asset classes. As an example, the U.S. stock market features the S&P 500, but there’s also an index that features smaller companies called the Russell 2000. There are also mid-sized companies stocks, growth stocks, and value stocks. Therefore if you’re in the S&P 500 alone, you’re really just reaching the tip of the iceberg.
What’s The Key?
- [7:00] – Over time value outperforms growth, and small and mid-size companies out-perform large companies, but they don’t do it every year. The trick is to keep the volatility down along the way by always having something moving up when other things are moving down. How do you know what’s going up? Buy buy buy! Buy low-cost index funds. Purchase real estate funds. Purchase commodities. Stay diversified. If you buy low, and diversify across asset classes and within them, you’ll have a greater chance of protecting your portfolio.
- [2:28] – Explaining The Bond Market.
To be diversified, you have to purchase across asset classes and within asset classes. If you're just buying the S&P 500, you're missing out on so many other investments. - Mr. Stillman's OpusTweet This