Having already bought the beef hot-dogs and wings, I’m already getting that queasy feeling just thinking about eating those delicacies at 2 a.m. while watching the Super Bowl. It’s Super Bowl weekend after all and after non-stop hype over the last few weeks, the big game is just about to kick off. One of the storylines is how will the ageless Tom Brady, who many consider the best quarterback of all time, perform in the big game against athletes who are 15 years his junior. I know that it’s not popular to say this outside of the New England region, but I really like Tom Brady. For Brady, it’s all about the team and winning. As he said, “I just love working hard. I love being part of a team; I love working towards a common goal.”
In today’s statistic driven world of sports, this is unusual. In basketball, you have a player who has this incredible streak of scoring more than 30 points in 24 straight games. It’s also very impressive, until you see that he is a major ball hog that shoots more than 30 times a game to gain all those points, because his shooting percentage is so low. Great, so he puts up great numbers but he has never won a championship, and that is the ultimate goal. Then you have Brady, who is not a great athlete, wasn’t heralded coming out of college, but just works much harder and is more driven to win than anyone else, and puts the good of the team first and foremost. And boy, has he managed to win Super Bowls! It is the reliance on a team effort that I would like to focus on vis-à-vis your investment portfolio.
Football is the definition of a team game. There are three aspects to a football game; offense, defense and special teams. If even one of those three is weak, the chance of success is limited. In other words, you need a diversified team approach to achieve ultimate success. While there are a couple of stars, both teams in this year’s game personify the total team’s approach. They are both teams with solid players that work together as their recipe for success.
IT’S THIS SAME diversification that is key in managing risk in your investment portfolio.
There are those professionals who believe diversification is the magic sauce for insuring that you won’t lose money. Well, that is not true. Investors who diversify can lose money just like anyone else.
According to Morningstar, “having a diversified portfolio doesn’t mean you’ll never lose money. Diversification doesn’t mean complete protection from short-term dips or market shocks. Diversification does not guarantee that if one investment goes down, another investment will go up – it isn’t a seesaw.”
Since I started talking about hot dogs and wings let me continue with the food analogy, in order to explain the concept of diversification. Let’s say you have some friends coming over for a Shabbat meal. Would you only serve roast beef or chicken wings to your guests? Doubtful – certainly in my house! Even for those of us meat-lovers, we would expect some salad, vegetables, drinks, and deserts to be served as well. And of course, some tea to wash it all down! You want your Shabbat meal to be successful and you need a well-rounded menu.
If it’s good enough to win the Super Bowl and successful entertaining it must be a good way to invest. What is diversification? It is an investment approach that uses many varied investments within a portfolio. The theory states that a portfolio of different kinds of investments will yield higher returns and pose lower risk on average than any one single investment. It is a way to smooth out volatility in a portfolio caused by market, interest rates, currency and geopolitical risks. In laymen’s terms, don’t put all your eggs in one basket. And you need to go back to this past December to see that while diversified portfolios also lost money, they fared much better than concentrated portfolios which got killed.
Steadier approach
The whole point of diversifying is to lower risk in a portfolio. For most investors, a slow and steady approach is the path to financial success.
After the huge market drop, now is a great time to review your portfolio and see if you are too heavily weighted in just a few investments. If so, you may be able to benefit from proper diversification, to help improve returns and lower your risk.
Go Patriots!
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing. www.gpsinvestor.com; aaron@lighthousecapital.co.il.
