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Diversification: Don't Put All of Your Eggs in One Basket


Building on a pretty good year through October, our models have produced competitive returns in November, once again. Even better, we have managed to do so while maintaining diversification instead of tilting heavily to the investment flavors of the day.

Over the last month or so, it has been tempting to focus on “day-to-dayism.” This is a term that reflects the defined foible of many reactive investors who sell quickly on scary rumors and bad news, before reasonable analysis could be used to determine if a true problem was at hand, or if the stock or other type of investment would most likely rebound to its former, higher, level.

A recent example was on December 1st and ABC News correspondent reported that General Michael Flynn, who assisted then-candidate Trump during the presidential campaigning and served for a short time as his National Security Adviser, had agreed to a plea deal in which he would testify that President Trump had told him during the campaign to communicate with the Russians. Conferring with foreign powers to influence U.S. elections is illegal; this would have been a big problem for the president. As a result, the stock market dropped about two percentage points in short order.

As the day went on, however, it became clear that President Trump instructed General Flynn to contact the Russians and leaders of other countries not during the campaign, but after the election, in December, during the presidential transition, for geopolitical reasons. Though somewhat unorthodox, this type of contact would be nowhere near as dangerous to the president’s legal prospects as contact with a foreign power in order to influence and election.

As a result, the market recovered as the day went on, finishing barely in the red. However, investors who sold stocks on the details of the original ABC report could hardly be comforted by that, as they had already lost a lot of money.

So, instead of focusing on the rumors du jour, it’s much better to keep your eye on the long term prize by investing steadily in no-load funds and ETFs that have promising prospects for the future, come what may in Washington, And, if you like to factor macroeconomic considerations into your investment program, better to focus at this point on a U.S. economy that has grown in excess of 3% the last two quarters, with mild inflation, surely not an awful landscape for equity investors.

Recently the markets have passed through a very calm period with an upward trend. As time passes, something will spook the markets, and returns will suffer. You simply can’t expect the same experience over the next 12 months that you’ve seen over the last year. Our first line of defense is staying diversified. As certain asset classes out perform others, there needs to be adjustments taken from the asset classes that have made profits and buying into those that have performed poorly or not as well. This buy and sell also needs to be done while considering other factors in the economy such as interest rates, strength of the dollar, valuations of the asset being sold and bought and others.

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