Mind Games: The Magnificence of Diversification
Diversification is often defined as “Don’t put all your eggs in one basket.” It’s something we do to reduce volatility and manage risk. But there is another reason to diversify.
We diversify in an attempt to increase the return on our investments. Diversification provides the opportunity for investors to both reduce risk and increase return…a goal of most investors!
Diversification in 2023
Through the middle of the year, the majority of the S&P 500’s return has come from just seven companies. Just 7 out of 500! These companies have been called the “Magnificent Seven” because of their strong performance.
Stock market performance being influenced by just a few stocks is not uncommon.
Since 1926 only 2% of publicly traded companies generated 90% of the wealth in the stock market.1 The same report found that 58% of stocks during that time reduced shareholder wealth.
Wouldn’t it be great to identify and own just those companies that will propel the markets going forward? As much as we wish we could, and as much as market experts portend to know, the reality is no one knows. Experts and investors may have strong convictions, but convictions do not translate into sure things. The market is unpredictable by nature.
Diversification Going Forward
And this is why diversification can help increase returns. A broadly diversified portfolio increases the probability of owning the best performers…no guessing or luck required.
Diversification is a wise investment process because it allows us to manage our risk, improve portfolio returns, and it can even make it easier to remain disciplined to your strategy during difficult times.
By Anthony C. Williams, CWS, ChFC, MRFC, CLU | Investment Advisor Representative | President & Founding Partner of Mosaic Financial Associates & Orthopaedist Advisory Group | Securities and advisory services offered through Cetera Advisors LLC, Member FINRA/SIPC, a broker/dealer and a Registered Investment Advisor. Cetera is under separate ownership from any other named entity.
A diversified portfolio does not assure a profit or protect against loss in a declining market. Diversification and asset allocation do not ensure a profit or guarantee against loss.
- Source: Morgan Stanley. Birth, Death, and Wealth Creation: Why Investors Need to Understand Corporate Demographics, July 25, 2023. Research covered market data from 1926-2022.
© The Behavioral Finance Network