Do you remember the Lost Decade? It’s a reference to 2000-2009 when U.S. stocks took a bumpy ride. For instance, if you invested $1 in the S&P 500 on January 1, 2000, it would be worth around 90 cents on December 31, 2009. Meanwhile, most equity classes outside of the U.S. generated positive returns for the same period.
The Lost Decade
Ouch. That definitely hurt more than a few investors whose portfolios were solely focused on the U.S. market.
But we need to face a hard truth. We have no way to predict when a similar situation might happen again. After all, past performance is no guarantee of future performance.
So, where does that leave us?
Well, we could stick all our money under the mattress. Other than a lumpy bed though, we won’t get much benefit from that option. But there’s another possibility that can make a difference: diversification.
Let’s be clear. Meaningful diversification isn’t about a portfolio with a mix of stocks from different companies in the same sector. It’s also not about picking and choosing a bunch of individual stocks based on your secret formula. (Hint: Just because you love a product doesn’t mean you should own the company’s stock.)
When we talk about diversification at Strathmore, we’re talking about a broad and balanced portfolio based on a range of global investments. Why global? Because as we’ve seen time after time, international markets often move opposite of each other. A diversified portfolio tries to capture a reasonable slice of that total investing world.
Think of it as blending a bunch of different risk together to hedge against the ups and downs that come with investing. Again, diversification doesn’t come with a guarantee, but it’s a valuable tool that too often gets ignored. Diversification also helps when we look at individual behavior.
Warren Buffett, the Oracle of Omaha, got it right when he said, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Now, as smart and wise as that advice might be, how easy is it to practice in reality?
Think back to the headlines that dominate our financial news. The focus tends to be on the really good news or the really bad news about the specific performance of an individual stock or even index. The really good news can tempt us to abandon our financial plan and pile into whatever “hot” stock has everyone excited. The really bad news can give us a push to jump out of an investment at the exact worse moment.
With a diversified portfolio, we’re smoothing out the rough edges and making it easier — at least emotionally — to weather the ups and downs that come with investing because we’re not relying on any one investment to determine success. Of course, as with any other investing tool, it doesn’t come with a guarantee. But diversification’s long-term value has been proven time and again, and it remains one of the best paths forward to moderate our risk against another Lost Decade.