By Scott Reed
Has there ever been a better time to believe in diversifying your portfolio? Diversification makes so much sense right now. We were given crystal-clear evidence last year that Congress has no real plan to get along and compromise in order to move forward.
If there is no compromise, there is no forward progress. The compromise battle continued until the very last minute, or in the case of the fiscal cliff, we actually fell off the cliff and were rescued by one of those big birds that rescued the Hobbit. At some point, when all hope is lost, our Congress will act. Action taken in the final hour is suspect at best. How do you form a financial plan with such lack of direction?
You diversify. You plan for every scenario and you take the politics out of the equation as best you can. What you have left is, hopefully, a portfolio whose performance is based on the success of the underlying investments and not so much on the bigger picture. If the U.S. markets do poorly, you have international investments to fall back on. If bonds do poorly, you have stocks. If stocks do poorly, you have real estate. If you don’t know which path you may be forced to take, then you make sure that you have something that will work for each path.
This method of investing didn’t work well in the credit crisis of 2007-2009 because, in a credit crisis, everything goes down. When we rebounded, everything came back up. But there have been only three major credit meltdowns in our history, so I don’t think it would be smart to invest based on the probability of another any time soon. They seem to come every 75 years or so. With any luck, most of us current investors should have other issues, like everlasting life, to contemplate by then.
At first, I was a bit uncomfortable starting with the blanket statement “this is the time to diversify.” Times of uncertainty also produce unusual opportunities for those that are willing to take great risks. In uncertain times the markets tend to wait for certainty and then make big moves. If investors are willing to take sides early into one of these messes, and they end up being right, then they could have the potential for large profits.
We see and hear about that all the time. We see someone who made a fortune by taking a bet that, in retrospect, seemed obvious. It’s important to remember that we also see lottery winners plastered all over the news. We never see the millions of losers interviewed. It gives us a false since of hope that we can be that person. That may be fine for the price of a lottery ticket, but the cost of betting your life savings and losing can be a game-changer for most of us.
So let me end with this: If you are like me and can’t afford to take unusually high risks in your investment portfolio, there has seldom been a more appropriate time to diversify your assets.
Scott Reed is CEO of investment advisory firm Hardy Reed in Tupelo. Contact him at (662) 823-4722 or firstname.lastname@example.org.