Gravel Road Investing
Owners of all-purpose motor vehicles often appreciate their cars most when they leave smooth city freeways for rough gravel country roads. In investment, highly diversified portfolios can provide similar reassurance.
That's why people who travel through different terrains often invest in a SUV that can accommodate a range of environments, but without sacrificing too much in fuel economy, efficiency, and performance.
Structuring an appropriate portfolio involves similar decisions. You need an allocation that can withstand a range of investment climates while being mindful of fees and taxes.
When certain sectors or stocks are performing strongly, it can be tempting to chase returns in one area. But if the underlying conditions deteriorate, you can end up like a motorist with a flat on a desert road without a spare.
Likewise, when the market preforms badly, the temptation might be to hunker down completely.
One common solution is to shift strategies according to the climate. But this is a tough, and potentially costly, challenge.
An alternative is to build a single diversified portfolio. That means spreading risk in a way that helps your portfolio capture what global markets have to offer while reducing unnecessary risks. In any one period, some parts of the portfolio will do well. Others will do poorly. You can not predict which. But that is the point of diversification.
You need to remember you can never completely remove risk in any investment. Even a well diversified portfolio is not bullet-proof as we saw in 2008-2009.
You can still work to minimize risks you don't need to take. These include unduly exposing your portfolio to the influences of individual stocks, sectors, or countries-or relying on the luck of the draw.
Add discipline and efficient implementation to the mix, and you may get a structured low-cost, tax-efficient solution.
Just as experts engineers can design fuel-efficient vehicles for all conditions, astute financial advisors know how to construct globally diversified portfolios to help you capture what the markets offer in an efficient way while reducing the influence of random forces.
There will be rough roads ahead, for sure. But with the right investment vehicle, the ride can be a more comfortable one.