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It comes as no surprise that losing money in the stock market can be painful, especially when you feel that you have no control over market volatility.
Many investors try to avoid losses by shifting funds toward the hottest-trending stocks that seem to be performing well or that are getting media attention, but this is not always the best approach to protect your portfolio. In fact, one of the best ways to cushion yourself against market volatility is to diversify your investments among many asset classes.
The Importance of Diversification
1. Crystal Balls Are a Myth
The reality is that no level of brilliance, research, or conviction can inform exactly what is going to happen next. This is a lesson that, as humans, we are constantly re-learning. In early January 2020, we were not predicting that a pandemic was going to disrupt the world, halting economies across the globe. While there are many other less dramatic examples, such as speculation about how the Federal Reserve will manage interest rates, or how Congress will handle our national debt, none of us knows exactly what decisions will be made in the next six months. The list of unknowns is infinite, and diversification is an acceptance of this fact that offers both a way to protect on the downside and benefit on the upside.
2. Diversification Lowers Portfolio Volatility Over Time
When a particular stock or asset class is going up, it is easy to forget that what goes up can also come down. In addition, when a portfolio goes down 50%, it must come back 100% to reach its former value. As depicted in the 15-Year Investment Performance chart below, diversification allows investors to lower volatility relative to returns, while enjoying reasonable returns over time without the pressure of selecting a single investment that will act as their golden ticket.
3. A Well-Diversified Portfolio Allows You to Participate Without Attempting to Pick Top Performers at a Moment in Time
The 15-Year Investment Performance chart above shows that by allowing for participation through various market sectors, the diversified portfolio produces compelling returns relative to the volatility level of the portfolio over time.
4. Diversification is Proven to Work
Diversification is the only “free lunch” in investing and is an important means to reduce overall portfolio volatility and improve returns over time. A well-diversified portfolio across asset classes provides a “smoother ride.” Downside protection and loss aversion are key considerations when selecting investments and building portfolios.1
In Closing
There are countless expressions regarding the importance of diversification in our lexicon, such as “don’t put all your eggs in one basket.” Unsurprisingly, the same is true of your investment portfolio. Limiting volatility is essential to meeting long-term financial goals. Diversification works and our philosophy is to construct all-weather portfolios, robust enough to navigate varying market environments so that you meet your financial goals.
About Roehl & Yi
Together, co-founders Tom Roehl and Jayman Yi, along with their qualified team of experienced personal wealth advisors, have more than 100 years of combined financial planning and investment experience. Their knowledge spans retirement plan management and consulting, complex financial analysis, estate planning, business formation, trading, and asset allocation best practices.
Contact Roehl & Yi Investment Advisors to assist you.
1Roehl & Yi Investment Principles
Roehl & Yi Investment Advisors, LLC (“Roehl & Yi”) is an SEC-registered investment adviser located in EUGENE, OREGON. This publication should not be construed by any consumer or prospective client as Roehl & Yi’s solicitation or attempt to effect transactions in securities or the rendering of personalized investment advice. A copy of Roehl & Yi’s current written disclosure statement as set forth on Form ADV, discussing Roehl & Yi’s business operations, services, and fees is available upon written request. Roehl & Yi does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly. We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
Nothing herein should be construed as the provision of personalized investment advice, nor should it be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without prior notice. Third-party data sources contained herein are for illustrative purposes only, are believed to be reliable, but we take no responsibility as to their accuracy. The brochure contains certain forward-looking statements that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially. As such, there is no guarantee that any views and opinions expressed herein will come to pass. Investing involves risk of loss including loss of principal. Past investment performance is not a guarantee or predictor of future investment performance.
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