Diversification – Own the Market and Reduce Risk
Nicholas Wright | August 1st, 2017
Once an investor decides to put his money to work in the financial markets, naturally the first question he must ask himself is: What should I invest in? Often, newbie investors expect the answer to be a secretive stock pick or the “hot” company that is making headlines on TV.
In fact, when I tell people I am in the investment industry, I am often asked what company or stock I recommend at that time. My answer is always this: everything!
Media outlets continually market the idea that you need to be buying/selling individual stocks and getting in or out of the market at critical times to achieve substantial returns. You will never turn on Mad Money and be told to “own everything.” Why? Because compared to active management, the diversified market-based approach just seems flat out boring.
So these market experts on TV point to examples of companies that have obtained huge growth like Amazon, without mentioning the most significant detail about concentrated single asset positions – Risk.
Not having all of your eggs in one basket is especially important when it comes to investing. Not only is the amount of risk great, for single asset positions, but it is unnecessary! In finance, this type of risk is labeled unsystematic or company-specific, as it can be eliminated by holding a diversified bucket of stocks. Meaning, by holding a fund with hundreds of different companies, you don’t have to worry that one company’s poor earnings report or employee strike is going to wreck your investment account and jeopardize your financial goals.
Owning “the market” allows your portfolio to capture market gains while also reducing risk and volatility. This approach will keep you focused on the long-term goal rather than frantically buying/selling based off headlines. Actively trading only increases costs and taxable gains, consequently decreasing the after-tax and net-of-fees return. Plus, it is extremely difficult to predict which companies will outperform the market at any given time. This is supported by a recent study that found since January 1, 2001, only 17% of actively managed US Mutual Funds have outperformed their respective benchmarks. This is the reason I tell my friends and prospective clients to own everything.
Investing in the financial markets is as much about emotion as it is logic, especially when your financial goals depend on asset appreciation. So rather than trying to outsmart the millions of investors, our team at Avier Wealth Advisors utilizes an academically proven market-based approach, which allows our clients to stick to their financial plan and avoid making financial decisions based on emotions. Knowing your portfolio is diversified and personalized for your specific goals and situation, along with our disciplined voice of reason, allows you to rest assured on your journey towards financial freedom.