The Two “D’s” of Investing
If you’re thinking, “Disenchanted” and “Defeated”, I hope to bring some “Hope” to you.
We CAN see our investments grow if we properly apply these two “D’s”:
Real diversification is not having three or four mutual funds in your portfolio, but owning different Asset Classes that have dissimilar price movements. Consider the S&P500 index. This index tracks the change in values in the top 500 U.S. Large Cap companies. Sounds like quite a bit of diversity- 500 different companies right? Not so much. This index actually falls under one asset class- U.S. Large Cap. So when there is negative news in the media (rare, I know), and the US stock market dips, this index will dip.
One simple example of diversification would be to own some US and some emerging markets . When one “class” dips, the other has a good chance of rising or staying the same, thus lowering the volatility (risk) in your portfolio. Now this is an over-simplified example, but the concept when carried out properly, is quite effective.
I see time and time again, investors whose holdings typically are far over-weighted in the S&P500; generally 60%-80% of their portfolio. In recommending a maximum of 7.5% allocated to the S&P500, and the balance distributed between US small cap, International small value, International Large value, 1-5 yr Government Bonds, etc., we bring greater expected returns while reducing volatility in the portfolio. It takes some careful planning and avoidance of being “sold” to build an appropriate portfolio that is also in line with your individual risk tolerence.
Let’s face it, most investors do not have the intestinal fortitude to do the right thing at the right time, and not give in to the emotional decision-making. The Dalbar study reveals that over the past 20 years, the average individual equity investor experienced an annual return of 1.8%, while the S&P500 index during the same time period had a 9.2% return!
Why the great disparity in returns? Imprudent Investor behavior! Selling when the markets go down, out of fear. “Switching” funds after experiencing a downturn in hopes that the next fund will do better; believing that they, or someone else can pick the winning stocks; and trying to “time” the market , are all examples of imprudent behavior which resulted in such bleak returns.
An unbiased investor coach will help you build a properly diversified portfolio and will provide the discipline assistance when you start “feeling” insecure or fearful to prevent the “imprudent” behavior that costs you so much in losses and fees. There is a lot of evidence and data supporting the rewards for creating a plan and sticking to it!