INVESTMENT DIVERSIFICATION IS A MUST

Volatility is a fact of life when investing in the stock market and the last year has been no exception.  Many investors  are  feeling the pain of this current decline, but it's especially difficult for those who were overly allocated in sectors like technology  or had too much of their assets invested in their employer's stock..  For many, this the first time they have ever experienced a market decline, so it's important we put recent events into perspective:

During the past 80 years, the stock market has dropped AT LEAST 10% eight different times.

The largest SINGLE DAY drop was a whopping 22% in October 1987. According to Towers Data Inc., from 1995-200, the Dow Jones Industrial Average had an annual return of 18.21%.  However, the since 12-31-30 the Dow has averaged 10.88%.  A substantial difference.

The market does not go straight up, nor does it go straight down. This is not the first and it probably won't be the last market correction we will face as investors.  On top of that, there are MANY factors that can make the market go up or down, & analyzing WHY it's going up or down is not going to help the situation. The key is to PREPARE & POSITION your portfolio for market volatility.

Put another way, if a severe hailstorm, blizzard or tornado were headed towards the your area, do you spend your time analyzing WHY the storm is coming your way, and what specific cloud formation caused the storms?  Do you blame the weatherman?  Or do you spend the majority of your time making preparations to survive the storm with minimal damage to your family and possessions? The key to protecting your portfolio & hard earned dollars is to understand that storms in the market do occur (many times without warning) & to take advantage of diversification and asset allocation.

Diversification:  What is it?

Diversification can be described as not putting all of your eggs in one basket, while asset allocation is making sure your baskets aren't all the same. For example, a person who only owns Microsoft, Yahoo, Cisco and Intel is overly- allocated in tech stocks and is not diversified. He's living and dying by one sector of the market.

The strategy behind diversification is by investing in various sectors of the market (oil, retail, technology, pharmaceuticals, banking, etc.) you may not be as seriously affected if a particular sector, company, or industry suffers.   Using the previous example, the person who owns all tech stocks may have  missed possible gains seen in the other sectors like oil, drugs, or consumer goods. That's the power of diversification. When some sectors of the market are declining, others may be advancing.

Asset Allocation

The process of asset allocation is deciding how much to invest in different asset classes, such as large cap stocks, international stocks, government bonds, real estate investment trusts, annuities etc. This is different from choosing which stocks to put in your portfolio.  Many investors spend too much time deciding which particular stock and bond funds to hold. They should spend just as much time (if not more) on determining the appropriate MIX of asset CLASSES.

In fact, did you the choice of which asset classes to invest in is the single most important determinant of investment returns? An ongoing study of pension funds' investment earnings conducted by Chicago based Brinson Partners and published in the Financial Analysts Journal, indicated that the asset allocation decision accounts for a whopping 94% of the variability in a portfolios' total return.   What's surprising is the selection of individual stocks within each  asset class accounted for only 4% of the total return. So now, the question becomes: What's the right investment decision for you?

Decisions, Decisions

That depends on two considerations: your personal investment goals and your comfort level with the typical stock market fluctuations.  Ask yourself:  why are you investing?  When do you need your funds?  How much risk are you willing to take?    Each person is different, so what may work for one person may not be suitable for another.   Just because your neighbor drives a black SUV doesn't mean that same SUV is right for you.  It's the same with your portfolio.  Look at your situation and make the proper decisions for your situation, no one else's.  The market is in a downward trend at the present time, but the long-term odds are in our favor. On average, from 1926 to the present, the stock market has been up two out of every three years. Of course, past performance is no guarantee of future results, but utilizing an asset allocation plan can help take the sting out of times when the market isn't so kind.

Provided courtesy of Jeffrey T. White, a Registered Representative with Waterford Investor Services NASD/SIPC.  The articles and opinions in this publication are for general information and are not intended to provide specific advice or recommendations for any individual.  It is suggested that you consult your attorney, accountant, or tax advisor with regard to your individual situation.  For more information, please call Jeffrey at (888)876- 9506  or visit his website at  http://www.jeffeytwhite.com.

 

 

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