Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land. ~ Ecclesiastes 11:2 (NIV)
The above chart is what is known in the industry as a skittles chart. The chart looks at the annual return for different asset classes – a way of looking at the market. Stocks are grouped in asset classes by the way they behave in different markets. For instance, when one US large company does well, the other US large companies also tend to do well. Thus, US large companies are an asset class.
As you can see, there is no pattern to the returns. As nobody can predict the future, nobody can predict which asset class will be the top performer for the upcoming year. We like for a portfolio to be spread across multiple asset classes.
Similarly, we think it is prudent to own numerous securities. Warren Buffett is to have said “the fastest way to get rich is to own one stock.” I don’t think he ever said, “the fastest way to get poor is to own one stock.” But the second statement is as true as the first. Diversification is basic investing-you do not “put all your eggs in one basket.”
We usually do not recommend individual stocks for this very reason. The risk is just too high.
Diversification can be tricky. In your 401(k)’s and other company provided accounts, you may not be as diversified as you think. We can help.
We would be happy to look at your accounts and give our thoughts as to a proper diversified allocation.
Diversification does not guarantee a profit or protect against a loss
*Data Sources: Center for Research in Security Prices (CRSP), BARRA Inc. and Morgan Stanley Capital International, March 2014.
* All investments involve risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Past performance is not indicative of future performance. Treasury bills are guaranteed as to repayment of principal and interest by the U.S. government. This information does not constitute a solicitation for sale of any securities. CRSP ranks all NYSE companies by market capitalization and divides them into 10 equally-populated portfolios. AMEX and NASDAQ National Market stocks are then placed into deciles according to their respective capitalizations, determined by the NYSE breakpoints. CRSP Portfolios 1-5 represent large-cap stocks; Portfolios 6-10 represent small caps; Value is represented by companies with a book-to-market ratio in the top 30% of all companies. Growth is represented by companies with a book-to-market ratio in the bottom 30% of all companies. S&P 500 Index is the Standard & Poor’s 500 Index. The S&P 500 Index measures the performance of large-capitalization U.S. stocks. The S&P 500 is an unmanaged market value-weighted index of 500 stocks that are traded on the NYSE, AMEX and NASDAQ. The weightings make each company’s influence on the index performance directly proportional to that company’s market value. The MSCI EAFE Index (Morgan Stanley Capital International Europe, Australasia, Far East Index) is comprised of over 1,000 companies representing the stock markets of Europe, Australia, New Zealand and the Far East, and is an unmanaged index. EAFE represents non-U.S. large stocks. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes and different methods of accounting and financial reporting. Consumer Price Index (CPI) is a measure of inflation. REITs, represented by the NAREIT Equity REIT Index, is an unmanaged market cap-weighted index comprised of 151 equity REITS. Emerging Markets index represents securities in countries with developing economies and provide potentially high returns. Many Latin American, Eastern European and Asian countries are considered emerging markets. Indexes are unmanaged baskets of securities without the fees and expenses associated with mutual funds and other investments. Investors cannot directly invest in an index.