The most straightforward and valid reason to diversify is that we don’t know what assets will do well in the future and which will do poorly. In other words, we cannot predict; we can only prepare for the uncertainty of certainty through diversification.
When we invest during a period when 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 the outperformers. Despite these inclinations, strong evidence suggests 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? Can anyone guess what was the worst performer? Yep, it was technology1. 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 (comprising 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.2
How do you make sure you own those extreme winners? It’s difficult, if not impossible, to do without diversification or investment discipline. We diversify to help us own the extreme winners that drive a lot of stock market gains.
Final Thoughts
Diversification works well over market cycles, allocating not only into diverse investments but also into buckets to ensure efficient tax planning and provide for a volatility buffer. However, when we evaluate performance in the short term, we may become disappointed and discouraged. That is why investing is a journey. I am here to help you take the long-term view and make the best decisions aligning with your values, goals, and aspirations.
Stay relentless,
Scott
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
This blog contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this blog will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. (Anthem Financial) does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.
Past performance is no guarantee of future results.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The Russell 3000 Index is unmanaged index comprised of the 3,000 largest U.S. companies based on total market capitalization.
1 A Wealth of Common Sense, The 2024 Sector Quilt, Jan 15, 2025.
2JPMorgan, The Agony & Ecstasy: The Pros and Cons of Concentrated Positions.
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