Understanding the Social Security Fairness Act
When someone says they're "all in" with something, that's usually in a very positive context. It could be for exercise, diet, church attendance, a relationship, or giving up a bad habit - all wonderful things.
But when it comes to investing, I worry that being "all in" could mean being all in on whatever the latest investment fad is. This could be a tech stock, a crypto asset (let's please not call them currencies), or the most recent strategy with incredible performance.
Let's face it, as investors, sometimes we can be like the 6-year-olds playing soccer - all crowded around the ball. Definitely not at the right place at the right time. For investing, it's the crowded trades. This is highly compounded and in a negative way when everything is highly correlated and the market has a meltdown.
As counterintuitive as it seems, having some things that zig while others zag is exactly why diversification helps investors during periods of market turbulence. It doesn’t seem to make sense when the highflyers are flying ever higher, but it certainly helps during periods of market stress.
Diversification is and will continue to be the only free lunch on Wall Street. And it is a delicious lunch not to be forgotten. If investors forget it, the markets have a humbling way of reminding us. Regardless of how undiversified one may be, it’s not too late to diversify and it is still free.
I regularly pore through thousands of charts - of stock prices, indexes, currencies, commodities, risk models, economic time series, fundamentals. The one observation I notice time and again is that I want different sectors, styles, regions, and sensitivities to different factors in the portfolios we manage. When it comes to purely looking at technicals, I don’t want all the charts to look the same. Unless I miraculously stumble upon a crystal ball that gives me perfect foresight, diversification will always be deeply rooted in my process.
Will I miss the massive upside of large exposures to certain stocks or asset types that are either trending or trendy? Absolutely. But I will also avoid some of the painful and deep drawdowns of having too many eggs in one basket.
In the spirit of total transparency, I like some of the Mag-7 stocks, quantum stocks and some stocks that aren't yet cash-flow positive. But my process keeps me constrained to limit my exposures. This has taught me to learn to like things like value, low correlating assets, low volatility, and boring but high-quality names that are very profitable. It's not a perfect process, but it has helped, especially during market turmoil.
I wouldn't trade (no pun intended) this process for another. I understand that it means that some years will be leaner than the market while others will be more plentiful. In the long run, my goal is to capture less of the downside, even if I have to give up some upside during the raging bull markets.
Leaning into what is sometimes uncomfortable or even boring but with a disciplined and self-constrained process can help one to truly enjoy the only free lunch on Wall Street, diversification.
Bon appétit!
Disclosures & Important Information
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through WCG Wealth Advisors, LLC, an SEC registered investment advisor. WCG Wealth Advisors, LLC and The Wealth Consulting Group are separate entities from LPL Financial. LPL Tracking Number: #718149-2
These views are those of the author, not of the broker-dealer or its affiliates. This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. All investments involve risk, including loss of principal. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.
Fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. You cannot invest directly in an index. Consult your financial professional before making any investment decision.
