I was on a webinar today that included Jason Zweig, a journalist for The Wall Street Journal, on its panel. I respect Jason. He is a voice of reason for investors.
Jason made a comment about diversification that we should all bear in mind. He said, "Diversification works over time. It does not work all of the time."
This is an important distinction. Investors who believe diversification does not work should review the academic research on the role of diversification in investment performance. The data indicates that risk is lowered and returns are enhanced through proper diversification. Modern Portfolio Theory proves this to be true.
Investors have their own proof that diversification does not work at all times. During the market crash of late 2008 through the spring of 2009 investors saw that even a well diversified portfolio can suffer sign cant losses. In times of crisis, virtually all asset classes tend to move downward.
Many investors (and far too many advisors) have made the claim that "diversification is dead." This is not true.
Investors who remained invested through the full cycle of market crash to recovery have generally fully recovered their losses. The losses they experienced were temporary.
Investors who divested during the market crash converted what would have likely been a temporary loss of value into a permanent, realized loss.
I have recently read two books on market crises, bubbles, manias, depression, crashes, etc. We know that these market events happen fairly routinely. In fact, they tend to happen every 10 years or so. This has been true for about 400 years.
Intelligent Investors will not be surprised when the next market swoon occurs. They will buckle their seat belts and ride it out. For doing so, they will be rewarded on the other side.
Jason made a comment about diversification that we should all bear in mind. He said, "Diversification works over time. It does not work all of the time."
This is an important distinction. Investors who believe diversification does not work should review the academic research on the role of diversification in investment performance. The data indicates that risk is lowered and returns are enhanced through proper diversification. Modern Portfolio Theory proves this to be true.
Investors have their own proof that diversification does not work at all times. During the market crash of late 2008 through the spring of 2009 investors saw that even a well diversified portfolio can suffer sign cant losses. In times of crisis, virtually all asset classes tend to move downward.
Many investors (and far too many advisors) have made the claim that "diversification is dead." This is not true.
Investors who remained invested through the full cycle of market crash to recovery have generally fully recovered their losses. The losses they experienced were temporary.
Investors who divested during the market crash converted what would have likely been a temporary loss of value into a permanent, realized loss.
I have recently read two books on market crises, bubbles, manias, depression, crashes, etc. We know that these market events happen fairly routinely. In fact, they tend to happen every 10 years or so. This has been true for about 400 years.
Intelligent Investors will not be surprised when the next market swoon occurs. They will buckle their seat belts and ride it out. For doing so, they will be rewarded on the other side.
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