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What is Disciplined Diversification?

What is Disciplined Diversification?

February 06, 2019
Years like 2018, when markets are moving up and down hundreds of points a day, can make staying the course and being disciplined with our diversification a difficult and emotional proposition. These feelings are exacerbated by the daily headlines and pictures that the media throws at us. It is important to remember that the media's main job is not to educate you, but to keep you coming back and tuning in again.
Headlines during the month of December shouted that 2018 was the worst year in the financial markets since the financial crisis of 2008. Many of us vividly remember the pain and fear as we watched the failure of Lehman Brothers and AIG, as well as the government bailouts of the financial system. Many of us also remember watching the value of our portfolios drop 30% or more during that time period. Certainly, none of us wish to relive that. However, lost in the recent headlines is the fact that the S&P 500 fell 38% during calendar year 2008, yet dropped only 6% in calendar year 2018. Comparing the pain of the two years seems to be a journalistic stretch.
We know that being successful requires several emotional attributes. The first is FAITH. Warren Buffett exudes this in spades. Faith that when things look bad, ingenuity and free markets will prevail, and things will get better. The second is PATIENCE. This is especially difficult during periods of time, like the Fall of 2014 to the Fall of 2016, when the markets seemed to grind sideways for two whole years before they rose again. The final emotional attribute is DISCIPLINE. During time periods like the late 90s or the mid 00's, it is very easy to let a diversified portfolio drift astray when the siren of stocks or residential real estate comes calling. It seems like these assets are going up and we are missing out. Don't be fooled by the attractive improbability. If it was that easy, everybody would be rich. Since most people are not rich, I do not want to do what most people are doing. My guess is, neither do you.
Our good friends at BlackRock have put together a chart that we have attached. It shows the benefits of staying diversified over long periods of time. When markets are moving up quickly, sometimes investors regret that their diversified portfolio is not moving up as much. Other times, when markets are moving down, clients fear that their diversified portfolio is still losing value. This chart shows that over the long term, a diversified portfolio will help you get towards your destination, while managing your risk.
Having a plan and staying invested in an appropriately diversified portfolio requires all three emotional attributes. These principles will help long-term investors reach their family's wealth building and retirement income goals. The team at Impel Wealth Management is here to help you manage the emotions and the process as we all "Move Life Forward" together.

*A diversified portfolio does not assure a profit or protect against loss in a declining market.