By Yvonne Marsh, CFP®, CPA
A retired couple came to my office recently to talk about their investments. In the course of our conversation, the husband wondered aloud how he could have lost a third of his portfolio in 2008 when he had invested in mutual funds, rather than individual stocks. Didn’t he have his money well diversified? On the surface it seems so. But after we talked further, I found that he had inadvertently invested in mutual funds holding one kind of investment – large cap stocks – and that particular asset class had suffered a 37% decline that year. He had mistakenly put all his investment eggs in one basket.
True investment diversification spreads your money across many asset classes – large cap stocks, small cap stocks, mid cap, growth, value, US, international, real estate, less-risky bonds and fixed income, cash…well, you get the idea. Each asset class performs differently under changing market conditions. The trick is to find the right mix that suits you and your unique risk profile.
Understanding how well you can financially and emotionally withstand a market downturn is critical to building a diversified investment portfolio that suits you. Why is this so very important? When you are invested in your right mix, you’ll stay in the market through its inevitable ups and downs. If you inadvertently take too much risk, you’ll flee to safety as many investors did in 2008. And if you get out, when do you get back in? For those too terrified to get back in the market, they missed the significant upswing in 2009 and beyond. The ability to stay invested in the market over time is critical. According to a Fidelity study, if you invested $10,000 in the S&P 500 index in 1980, it would have grown to $659,591 by 2018. If you missed just 5 of the best days in that time period, you would only have $427,041. Those 5 days cost over $230,000! The statistics don’t lie – jumping in and out of the market does not work.
Diversification and disciplined rebalancing is THE key to building wealth over time. It’s simple, but not easy.
Marsh Wealth Management, LLC
Fiduciary Registered Investment Advisors
504 Ebenezer Road
Knoxville, TN 37923
Financial Planning & Investment Advisory Services are offered through Marsh Wealth Management, LLC (“MWM”), an independent investment advisor registered with the state of Tennessee. Yvonne Marsh is an Investment Advisor Representative of MWM in the state of Tennessee. Marsh Professional Group, LLC, is a TN registered public accounting firm and a separate legal entity from MWM. For a detailed discussion of MWM and their investment advisory fees, see the firm’s Form ADV on file with the SEC at www.adviserinfo.sec.gov.