Market Wrap-up for Aug. 22 – A Reminder to Remain Diversified

Navigating the ups and downs on Wall Street is no easy chore, even for seasoned market veterans. So why do so many investors, especially self-directed ones, strive to time the markets when there is a plethora of evidence that suggests the odds are clearly against them?

The simple answer is greed and laziness; that is to say, countless investors would prefer to pick and choose the securities that are poised to go up the most in a given year rather than roll up their sleeves, do some good old fashioned research, formulate a long-term strategy, and be patient [see also Market Timing the Best and Worst S&P 500 Trading Days].

After all, would you rather sit and wait on your diversified portfolio to steadily increase in value over the course of many years, or would you rather use your crystal ball to cherry pick the best performing assets each and every year?

Why Cherry Picking Assets is Less than Ideal

Don’t even bother answering the last question because the reality of the situation is that you don’t have a crystal ball (and neither does your financial advisor). Consider the table below (click to enlarge) compiled by the Novel Investor which showcases the annual returns since 2000 for a variety of major asset classes. More importantly, note the light gray box labeled “AA” in each year, which is representative of a well-balanced portfolio that is comprised of all the other assets that are listed:

There are two important takeaways from this performance table. First and foremost, picking the best performing assets year after year is a difficult, if not altogether impossible chore. Sure, you may have gotten lucky with REITs three years in a row (2010-2012), but depending on when you started, your portfolio could still be recovering from the deep losses this asset class suffered in 2007 and 2008. The point here is that betting on last year’s winner rarely works out, especially for conservative investors who are counting on their portfolio to steadily grow over the long-haul [see also The Ten Commandments of Dividend Investing].

The second takeaway here is that for conservative investors, maintaining a diversified portfolio (the AA boxes) is often times the best approach to achieving success over the long haul. Notice how the diversified portfolio in the example above has managed to post positive returns in almost every single year; sure you might sometimes miss out on massive gains in a particular asset class, but overall, you are less vulnerable to losing a significant portion of your capital during times of uncertainty.