“The only investors who should not diversify are those who are right 100% of the time.”
Sir John Templeton
Successful investing can be a frustrating endeavor. All too poignant are the memories of the “Lost Decade” when hapless investors in the S&P 500 Index posted a negative ten-year return to begin the new millennium. One dollar invested in the S&P 500 on January 1, 2000 was worth roughly .90 cents on December 31st 2009. On the other hand, that same dollar invested in a well-diversified global approach, grew to more than $2.00 over the same time frame. By simply committing a third of one’s capital outside US borders, the disastrous lost decade was avoided.
Diversification helps investors capture returns across the globe and can help prevent prolonged periods of poor returns. Those embracing pure US stock exposure fell prey to “the risk of no return” for a decade. Those opting for a global approach found themselves lagging behind since the financial crisis but Q1 of 2017 delivered higher returns to those globally diverse in their approach. Curious that since Donald Trump won the US Presidency; “owning the globe” has once again become attractive and rewarding. Markets are unpredictable and tend to revert to the mean. Just as US Stocks seemed to be riding the crest of an endless wave, swells began forming offshore as Non US Equity Markets took on new life and power.
Once again the “smart money” turns off their TV, ignores the advice of Wall Street, stays the course, and takes the guesswork out of investing.
Finally, the Federal Reserve followed through on its threat to raise interest rates and bond markets were better prepared than a snow removal crew in Chicago before a blizzard. In fact, the bond market responded to the Fed’s increase with a slight rally in the days after March 15th when it all became official. We now enter a new era where higher rates seem inevitable. How far bond prices may drop and how high interest rates may go is anybody’s guess. For the first time in decades US investors find themselves searching for strategies to preserve principal while seeking higher yields: a double edged sword to say the least. Once again, diversification can play a vital role. Owning bonds across the quality spectrum, shortening maturities and taking advantage of the defensive nature of Treasury Inflation Protected Securities (TIPS), are sound strategies.
Real estate experts preach location, location, location.
Wise capital market investors proclaim: diversify, diversify, diversify.