Alluvial Blogs

Seed of Inspiration #2 - Is Your Portfolio Properly Diversified? It Should Zig AND Zag

04/12/2021

scroll down

Subscribe for updates

go
Is Your Portfolio Properly Diversified? It Should Zig AND Zag
By Lars Olson, CFP®, ChSNC™, CPFA, CAP®, CRPS®
President, Wealth Advisor
Alluvial Private Wealth

“A properly diversified portfolio will have a wide variety of investments, and some will zig while others zag. If your investments are only zigging, you’re not as diversified as you may think.”

It’s been said that “everybody loves a winner,” and that’s certainly true about investment portfolios. Looking at their investments, many people might be happy with a portfolio of nothing but winners. But for your portfolio to be truly diversified, you also need to have some “losers” in your portfolio as well. I’ll explain why, but let’s set the stage first.

Nobody knows what the future holds, and that’s certainly true for investments. You’ve heard it before – “Past performance is no guarantee of future results.” So if we don’t know what the future holds, then it’s in our best interest to protect ourselves against the unknown by diversifying our investments. 

The challenge of a properly diversified portfolio is that, by design, some investments will zig when others zag. That means the portfolio is deliberately holding investments that might underperform. That might seem counterintuitive, because investors want to buy investments that go up – not ones that go down. But, there’s prudence to that strategy.

Being truly diversified is particularly difficult in volatile times like 2020 where the pandemic took valuations to extremes. Technology companies and other “growth stocks” which helped us stay safe at home seemed to skyrocket, while retail stocks and other “value stocks” tanked and some of those companies even went bankrupt. Morningstar reports that the 2020 performance gap between growth stocks and value stocks was 32 percentage points – an even bigger performance gap than at the peak of the dot com boom of 1999. When the performance gap is very large, it takes serious discipline to remain invested in the underperforming parts of a diversified portfolio.

Staying diversified, however, is very important because last year’s losers can sometimes become this year’s winners. It’s only April as I write this blog, and so we don’t know what will happen with value stocks in the full year of 2021 after their record poor relative performance in 2020. Yet, we do know what happened after 1999’s then record growth outperformance: value stocks outperformed growth stocks by a large margin in each of the following three years.

Again: “past performance is no guarantee of future results.” Winners can become losers, and losers can become winners. That’s why it’s important to keep your portfolio properly diversified – even when it’s not easy to do so.

back to news

Blog