Why We Diversify

The simplest and truest reason as to why we diversify is that we don’t know what assets will do very well in the future, and which assets will do poorly. Diversification is the evidence that we cannot accurately and consistently forecast the future.  

When we invest during a period where one asset vastly outperforms all others, it can be very frustrating to remain diversified. We may be tempted to sell the underperformers and invest more heavily in that which is outperforming. Despite these inclinations, there is strong evidence to suggest that diversification is the best strategy. 

Evidence #1 

Over the past 10 years (2015 – 2024), technology stocks performed best – by a significant margin. Energy was the worst performer. But did you know that from 2000-2014, energy was the best performer? Any guess to what was the worst performer? Yep, it was technology. So, what asset class will perform best and worst over the next 10-15 years? No one knows. That’s why we diversify.  

Evidence #2 

JP Morgan recently published an in-depth analysis of the Russell 3000 index (comprises 98% of US stocks) over the past 35 years. Since 1980, they found that 40% of the stocks in the index were extreme losers - suffering a catastrophic loss of 70% or more from their highs and never recovered. And as far as the extreme winners…the ones we all wish we owned from the beginning? Extreme winners were only 7% of the stocks.

How do you make sure you own those extreme winners? It’s very difficult, if not impossible, to do without being diversified. We diversify to help us own the extreme winners that drive a lot of the stock market gains.  

Our Approach 

We recommend that clients own multiple asset classes across multiple sectors. Diversifying investments across 8-12 different low correlated investments helps spread out the risk. Stocks should cover multiple sectors like technology, healthcare, and consumer goods. Bonds should include government and corporate with varying credit ratings. Real estate investments should help provide income and long-term growth. Private debt offers income opportunities, while private equity enables long-term growth. Annuities provide principal protection along with growth or income. Oil and gas can provide royalty income. A balanced mix enhances resilience and maximizes returns. 

Final Thoughts 

Diversification works very well over market cycles, but when we evaluate performance in the short term, we may become disappointed wanting all our money invested in the hot asset class.  That is why investing is a lifelong journey, not a moment. I am here to help you take the long view and make the best decisions in line with your goals and aspirations.