As an active investor over the past 15 years, I’ve learned (usually from losses) the value of diversification…not only in my investments, but in my income as well. The logic and value behind a “multiple streams of revenue” approach seems more inviting and necessary today than ever before in my investable years. My concern and frustration regarding the recent stock market volatility is summed up in today’s Yahoo Finance headline -"Disaster scenario" comes into focus as stocks, commodities slump. Really??? Is this really where we are in “group thought” as a few weeks of volatility has entered the marketplace? Mind you, we were bouncing around the 7k – 8k range in 2009, and now we’ve broached the 18k handle on a few occasions some 6 years later. THAT is a dynamic rally, and like clockwork, as volatility increases, the panic ensues. This group thought dynamic, whether it be market volatility, oil, terrorism or even ebola, can grab quickly and accelerate.
As I ponder this, I realize now that the lessons I learned as a child (save for a rainy day), clearly aren’t held by a large percentage of the population, but the lessons I learned later in life, namely that diversification works, is hopefully a lesson that many grasp and implement. The culture now is clearly on a path similar to the hamster on the spinning wheel…we have to keep moving along. Mind you, this thought isn’t based on motivation and a “can do” attitude, it’s based on the need for increase at all costs (this applies to the individual as well as government thought around the globe). We’ve entered a time where the only planning seems to be that things will continue to be stable or better (much, much better).
What happens however if things do go bump in the night? What does your portfolio look like? Do you have stable monthly returns that produce income? Do you have some real estate exposure, rentals perhaps or private lending options? Do you have a small percentage of your income in commodities, international exposure, in gold and silver, in cash (hopefully a decent percentage in cash?). Are your investments working for you, and if so, are you comfortable to weather any storms that could be on the horizon. Stocks clearly have been the place to be, and certainly can continue on this course. In fact, I believe the S&P is up approximately 175% since 2009. Fantastic returns no doubt, but as you reflect on this number, I’ll ask you simply to ask yourself if your portfolio matches that performance – it doesn’t. In fact, ask any of your friends what the approximate portfolio increase is with their 401K’s and IRA’s, and you will be lucky to hear a 20% or higher number. Why is that? I challenge all to read the following report by Robert Hiltonsmith of Demos, a non-partisan public policy organization – very interesting read: http://www.demos.org/sites/default/files/publications/TheRetirementSavingsDrain-Final.pdf
Another lesson I was taught is to “build my house on rock, not sand.” It is through diversification that I hope to ultimately accomplish this regardless of any “dark clouds” on the horizon…time will tell. Diversification works – consider where your allocations are, and consider what opportunities are available to you, because everyone can concur that the future is uncertain, and proper planning is not only a diligent step but a clear example of wisdom. The hallmark of wisdom in finances is diversification.