I’m a believer in Diversification as a component of any long term investment strategy. One of the most famous money managers of all time, Peter Lynch, once said “I love all my stocks–that’s why I own them–but I know 20% are going to be dogs and disappoint me. I just don’t know which 20%”.
This is a key investment strategy.
This week’s video I talk about Diversification and Dilution. Are you truly diversified?
TRANSCRIPT:
Good morning, Mike Brady Generosity Wealth Management talking to you from Boulder, Colorado. And today I want to talk about diversification, dilution, how much diversification is good, how much is a waste, just kind of what my thoughts are around that. Because every once and awhile I’m asked the question, “Mike, how much is you know really diluting the returns? And I’ve heard that so many sectors, or stocks or mutual funds or something, it’s just really waters everything down and you don’t get ahead…”
You know I’ve heard that before and my answer to that; and by the way I only hear that when the market is going up, but I never hear it when the market goes down. I mean people like being diversified when the markets are going down because chances are, I’m generalizing here, that the decline is not as much as if you were in one individual stock or one individual sector. And so really you have to look at both…, the market does three things; up, down, sideways- that’s it. There’s no rocket science around that. It goes up, down or sideways. And yeah, in an upward market you wish, that in hindsight, you were in this particular hot stock or this particular hot sector. But unfortunately, that’s hindsight and you have to acknowledge that we don’t know what the future holds. But what we are doing is an analysis of what we think might be in the future and weight things accordingly. Understanding that, “well, gosh, I might be wrong.”
And so, diversification: I’m not an individual stock picker. I’ve never recommended an individual stock to a client in my entire 21 years because I’m of the belief that I want to decide on a sector. And a sector in my mind is not necessarily biotechnology or something very specific, although that is also a sector, but what I’m talking about right here is large cap, small cap, middle cap, mid cap, value or growth, US, international. These are the types of sectors that I’m looking at. And it can also be sub-sectors that I mentioned earlier like biotechnology or health care or automotive or consumer discretionary etc. But either way, it’s really through analysis of what you feel that sector is looking at because when we go a layer deeper to the individual stocks there can be four out of five companies, let’s say, that are doing well in that sector and one that is not, and are you going to be good enough to choose (not choose in this case) that one that has done really poorly? I think that is a very difficult thing to do and so it’s one of the reasons that I believe that sector, or even which kind of category of stock or bond, depending on the client, is the better place to be.
From a diversification point of view, most studies have shown that once you get over 20 you’re not getting increased value for having that 21st stock or if you have 40 you’re not twice as diversified as if you just have 20. That’s what many studies have shown. My experience, and kind of my approach, is once I choose a kind of a broad sector, whether it’s large cap, small cap, mid cap, etc., I usually have one to two positions within there; a lot of times an index within those particular sectors. And the index itself is of course, usually dozens if not hundreds of stocks. But I’m buying the particular sector or that particular category, whether it’s growth or value or large or small, etc.
So I don’t believe that, I mean, dilution is really only when somebody wants to start hitting some home runs. I think that diversification is a better approach and the three types of markets that I’ve described, up, down and sideways, I do believe more in a kind of sector approach to it. If you haven’t already gotten that from this video, for goodness sakes.
So how much is too much? How much is too little? There’s no right answer to that. It is something that I talk about with each client and I’d love to talk with you as well. 303.747.6455, Mike Brady. I’ve got a couple of disclosures here coming up so stay tuned for that and you have a wonderful week. We’ll talk to you later, bye bye!
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Sorry in advance for a longer than usual video this month (7.5 minutes), but I have some charts and graphs in there to provide some context for the slow ride down in the un-managed stock market indexes that we saw for May.
The question we always have to ask ourselves is “what is this telling us?” and “what does this mean for the future?”.
Click to watch my video.
TRANSCRIPT:
Good morning, Mike Brady with Generosity Wealth Management speaking to you from Boulder, Colorado. And today I want to talk about what’s been going on in the markets; what’s happening in Europe, how that’s affecting things in the United States; kind of the United States by itself. But really, kind of what’s happened in the markets in the last month or so. I mean the unmanaged stock indexes in the last month or so are down about ten per cent and this is the third time in twelve months that we’ve seen within the space of a month a ten per cent decline, or so.
One thing that makes this May different is that it was a kind of slow steady decline versus lots of volatility. I mean if we look back to just last summer, remember when there were four and five and six hundred point swings on a daily basis. We just didn’t have that this past May.
Unfortunately, the last month has wiped out some of the gains that we had accumulated in the first quarter of this year. Just to provide some context the markets are actually still positive for the year, the unmanaged stock market indexes. So, the question you might ask yourself is, OK, we’ve had low volatility in May, it’s been a decline in the month. The optimist in you might say, well, the market is reading this, the market has actually done quite well over the last three or four years since March of ’09, and this is just kind of a step back, and it’s reading the market and it’s not freaking out. The pessimist in you might look at Europe and all the bad news there, how is that summer of discontent going to affect the global markets, the U.S. markets and what’s going to happen with the European Monetary Union, our continued bad job markets throughout the summer leading up in to the election etcetera? And say, “Wow, this is just the beginning. I’m looking at a big crevice before us, I’m looking at the abyss and I certainly don’t like it and I feel uncomfortable with it.”
One of the reasons we have long term diversified strategies, and hopefully you have one, is because that’s an investment, a conscious investment, in the future, saying that “I’m going to take three steps forward and one step back.” Maybe five steps forward and three steps back, however it is. But over the … why would you invest in something if you believe that long term that it’s not going to be greater in the future than it is now? Now I could sit here and show all kinds of studies which show that having exposure, having a well-diversified portfolio, is in the investor’s best interest as you’re reaching your retirement goals or as you’re in retirement, maintaining your principal and some income going forward.
But as we look at that, I’m going to throw up a chart here, on the screen and what you’ll see is intra-year declines are something that have always happened. And it’s not uncommon for there to be double digit returns. I’m going to circle a couple of them up on the screen. But what you’ll see is that does not mean that the year ends negative. So don’t write off this whole year just because it’s June and the markets, although they’re only slightly positive they’re not double digits or maybe what you would like. And so there’s more than fifty per cent of the year before us even though May has not been very favorable.
I happen to be a contrarian at heart and one thing that…, I’m going to throw a chart up here, is the equity allocation, the recommended equity allocation when it’s very high percentage, you’ll notice that it is kind of market tops, there at about 2000. A lot of times when people do not want to have an equity allocation, like March of ’09, is exactly when you want to do it. Let’s keep it in perspective that since March of ’09, the market, as of last quarter was up well over 100 per cent in an unmanaged stock market index.
One thing that you want to consider as well is having a very well diversified portfolio, including bonds both government and corporate. They have a tendency to reduce your volatility, of an individual portfolio. That’s why you have an asset allocation. That’s why you have a diversification. But you make various “tilts”, I might say, throughout the year. And that’s what I do on my clients’ behalf.
So, let me summarize here real quickly; the market in May has been very difficult. The question we have to ask ourselves is, “what does that lead us, what conclusion does that lead us through the summer and through the rest of the year?”
I stand by my conviction, which I gave at the beginning of the year, this is going to be a positive year. And the reason why I do that, even with all the negative information out there, OK, I hear it OK? And I certainly hope I don’t give off the impression that I’m stubborn. It’s like, “No, no, Mike won’t… data’s changing and he’s not changing.” Which at my last video I said, “Hey, I’m really concerned about things going forward.” And I think I was right in the last two or three weeks or so that there has been a weakening. But the reason why I am optimistic is still because of the strength, as I see it, in our companies that have fortified themselves against very uncertain times and some bad information going forward, OK?
If I am wrong, that’s why we remain diversified. And that’s why we keep our eye on the long term goal and have diversification, OK? You’ve got to have a good portfolio. But that being said, I don’t think I’m wrong. Why would I say something if I thought I was wrong? But I also have to have the humility, and every investor needs to have the humility, and you don’t bet all on one particular thing.
So, I am still optimistic for the year. I’m not changing my allocations in general at this point. I am not freaked out as in; the world is going to end this particular summer. I do believe the volatility is going to continue to be greater now than it was in the first quarter of this year. But I don’t believe, as I see it, as I do my analysis, that we’re going to see the kind of volatility that we saw last August.
There is a lot of data that’s going to come out this summer. Europe is still going to be the big news and so we have to watch that but we also have to keep it [take it] with a grain of salt; about how that’s going to affect us.
One thing that I continue to be concerned about is the coupling of Europe, the disappointing news out of Europe, and the disappointing economic, kind of macro-economic news out of the United States. I think that that’s a real disturbing trend. And of course, I continue to watch China as their numbers have faltered as well.
That being said, I’m holding true right now with the allocations that I have for my clients. If you need assistance, if you want a second opinion, I’m happy to give that to you. I certainly hope that you have a plan as well, that’s a multiple year plan about how to reach your goals and kind of live, reach your goals. Live within retirement at the lifestyle which you would like.
Anyway, Mike Brady, Generosity Wealth Management. Sorry this video’s been a little bit longer but hopefully I’ve given some good data in there as well and some good thoughts for you. Give me a call if you have any questions, 303.747.6455, and we’ll talk to you later, thanks, bye bye.
I have no idea what Facebook stock will do over the next 2 to 10 years. I hope it does great.
That being said, the above chart is the reason you don’t buy on hype or let your emotions lead your investment mind.
Be the smart money. Do your homework. Know why you buy a stock, under what conditions you’ll sell it, and be sure it’s part of a long term diversified strategy.
If you’ve ever had the unpleasant task of putting a loved ones affairs in order after their death, then you’ve probably thought “I wish they’d done this or that to make things easier. If only they’d known!”
Well, now is the chance for you to do something different with your estate.
This article is a pretty good list of things you can start today
Are you a “lane changer”? In traffic, he’s the guy who’s constantly changing lanes, expending a lot of energy but doesn’t really get ahead.
We all know we’re supposed to “buy low and sell high”, but unfortunately your average investor doesn’t do that. When we look at the flows into and out of equity funds we find that people are pouring tons of money in when the markets are high and withdrawing at market bottoms.
Why? By the time people feel comfortable with the direction of the market (investor confidence is increasing), they’re looking at recent past data and many times the “upward movement” has already occurred. A little late. Same deal on market declines.
I happen to believe in active management, but you’ve got to be disciplined and unemotional, and that’s tough to do!
In this week’s video, I expand upon these thoughts and even have some pretty graphs imbedded for you. Watch it please, and don’t be a investment lane changer!!
TRANSCRIPT:
Hi there, Mike Brady with Generosity Wealth Management. And I this week I want to talk about staying the course, OK? About six months ago I did a video about conviction, in which really I asked the question “what do you really believe in?” “What do you really stand for?” What is that line in the stand? And that could be in your own life; that could be in your financial life. It’s really a question that I think could have lots of areas where it’s applicable but right now it’s really about investing.
I’m going to throw a chart up in just a few seconds here, but most people do the wrong thing at the wrong time. And I don’t want you to be that dumb money, I want you to be the smart money. And people always say, “Oh I buy low and sell high.” But frankly most people throw lots of money into funds when it’s at a high, when they feel comfortable, like, “oh, yeah man, the market did so well the last year or two, and I’m going to throw lots of money in…” because they expect it’s going to continue to go up. And they think that the market is actually linear; meaning if it’s gone up, it’s going to continue to go up, or if it’s gone down, it’s going to continue to go down- and that’s just not the case! It goes up, it goes down, it goes sideways! And real people also withdraw money, you know, usually at the bottom. And so this is a good indicator, frankly, when people are taking money out, the contrarian in me, I say, maybe I want to invest in that. That’s a good buying opportunity. Warren Buffet has a famous phrase, “be greedy when others are fearful and fearful when others are greedy.”
And the chart, I’m going to throw it up there right now. You’ll notice, at certain times, I’ve circled them, the market has gone up, that’s the line, and then the bars are the money flows, in and out. And you’ll notice that the bars are the highest when the market is at the highest, which is what you don’t want. And then the, (sorry about that, I just hit my microphone) and then when the market is at a low is when people are taking all their money out- which of course is the exact opposite.
So, have discipline, please. Be the smart money.
I’m happy to help you with that. I talk with my clients all the time and I do these videos and these newsletters to really have good communication, good education, so we can go through this with as little emotion as we can, but of course we’re human. We’re not a bunch of Vulcans running around! But, let’s have our course, we’re at Point A, where are we going to Point B? Let’s go there.
My wife said something the other day at breakfast that I just thought was wonderful, which is, “you know if you’re going down the road, and you’re in traffic, and have you ever noticed that person who’s jumping from one lane to the other, trying to get ahead of everybody else? Well, a lot of time’s they are expending an awful lot of effort and not getting any further.” And it’s so satisfying, frankly, when you’re just sitting there, staying the course, and you just keep passing this guy. Well, I want you to be that person.
So, anyway, 303-747-6455, Mike Brady is my name, I’m the President of Generosity Wealth Management. I serve the Boulder, Denver, Longmont area here in Colorado, but I’m in many different states. Perhaps I’m already registered in your state and have clients in your state, if not, let’s have that conversation. I’m looking to grow my business and I hope to do the best job that I can for you, I really care, I’ll treat you like my family. 303-747-6455. You have a wonderful, wonderful week, thank you, bye bye.
