Diversification or Diworsification

Good Morning,

These past days have been fairly turbulent for the markets based on economic indicators trending lower, governments are starting to question the operations of the largest public companies, increased political uncertainty, and companies issuing lower earnings guidance. With everything going on, it made me think about a diversification article that Marketwatch posted last week. A couple of takeaways from the article are:

1. There is no way to consistently identify long-term winners
2. Based on a recent study: 1 of every 25 stocks was a long-term (4 to 7 years) winner
3. You should diversify among asset classes (small companies/large companies/stocks/bonds)

The author mentioned Target-date retirement funds as a possible solution because these products automatically diversify for the client, but the diversification is based on a broad-based assumption/rule. They do offer a "set it and forget it" option, but it leaves the investors at the mercy of that fund company. The other option is to have a more "DIY" approach which requires a lot more work and maintenance but can be a better fit for your risk/return goals.

At the end of the day, diversification can either help you or harm you based on the approach. The author showed how hard it is to pick stocks that do well over a long term time frame and subconsciously pushes people to invest in funds as opposed to individual stocks. The article did provide links that can help people to diversify their portfolio, but the author mentions that diversification can fail in down markets making portfolio construction pertinent.


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