Why Diversification Is Still King

Why Diversification Is Still King

Written by: Kyle Thompson

If you have watched the news or read the headlines over the past week you would think the markets were decimated yesterday with multiple reports indicating that the Dow experienced its worst day in history. This type of fear mongering is aimed to act on your emotions and I think it’s important to separate fact from fiction.  The Dow did close 1,175 points down on February 5th, which is the single highest point drop in a day, but the percentage decline of 4.6% was not even close to the worst day in history.  Furthermore, it can be expected that the higher index values will lead to larger price declines – this is a basic mathematical equation.  The percentage change is always a better measure when looking at market performance. 

We have seen a percentage decline of 8.3% from the Dow’s record high close on January 26 through the end of the day yesterday.

This is still below the correction territory of 10%. In March, this current bull market will turn nine years old, which is the second longest bull market in history.  During this time period, the market has seen four official corrections (moves of 10% or greater) and 60-some “panic attacks”. Do you remember the market reactions to the 2010 Flash CrashBP oil spill in 2010US debt downgrade in 2011Eurozone double-dip recession in 2012Taper Tantrum in 2013Ebola scare in 20142015-16 Chinese stock market turbulence, etc.?  If you heeded the warnings of the media at any point over the last nine years your overall investment returns would have been negatively impacted and you would have missed 96 new record highs in the Dow since the 2016 presidential election.  

What has caused the recent market volatility and when did good news become bad news? 

The market has clamored for rising wages for years and the irony is that last week’s labor report, which showed wages increasing by 2.9%, is likely the main culprit of the current volatility. The markets are concerned that wage and price inflation will accelerate faster than expected and the Federal Reserve is going to be forced to raise rates at a quicker pace than anticipated.  As rates rise, investors become concerned that it could choke the economy and lead to a rotation out of stocks in favor of the stability of bonds.

Related: Why Estate Planning Is Easier and More Important Than You Think

So, what should you do with all this noise? Our advice will sound familiar: tune out the market commentary and focus on your long-term financial goals.  Your long-term financial plan with Market Street already has market volatility built into your results.  These short-term gyrations should have little to no impact on your long-term goals, and therefore the best thing to do is to stay the course.

Seeing the markets reset is both healthy and expected and is needed to keep moving forward. We are often asked during raging bull markets why we hold certain asset classes, including cash.  Yesterday was a perfect example of why diversification is still king and why cash has its place in your portfolio.  While others fret over the market’s next move, we will sit back and continue to take advantage of the irrational behavior by managing your portfolio back to your target allocation via dynamic rebalancing (sell high / buy low).  

Market Street Wealth Management Advisors

Based in Indianapolis, Market Street Wealth Management Advisors, LLC (MSWMA) is an independent, fee-only Registered Investment Advisor. We believe in the value of a balan ... Click for full bio

Most Read IRIS Articles of the Week: Feb 19-23

Most Read IRIS Articles of the Week: Feb 19-23

Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, Feb 19-23, 2018

Click the headline to read the full article.  Enjoy!

1. Don’t Get Pinged by the Social Security Earnings Limit

I’d like to introduce you to Peggy. Born in 1956, Peggy will be 62 in 2018. She has worked in retail her whole life, the past twenty-five years spent in management. Peggy divorced from her husband 14 years ago, is still single and has no children. — Dana Anspach

2. We're Back to “Bad News is Good News” and “Good News is Great News”

This week the markets shrugged off last week’s fears and went back to the slow and steady melt up, despite economic news that looked likely to once again rock the boat. — Lenore Elle Hawkins

3. Q1 2018 Factor Views

Themes established in 2017 across a wide range of markets and factors continued to resonate through the fourth quarter. Economic growth was strong and supportive of equity markets across the globe, a range of volatility measures reached all-time lows, and business and consumer sentiment remained elevated. — Yazann Romahi and Garrett Norman

4. A Beneficial Basket of Commodities

Advisors and investors that feel they are hearing more and more about commodities and the corresponding exchange traded products in recent months are right. That is a natural result of dollar weakness and yes, the greenback is floundering again in 2018. — Tom Lydon

5. 3 Trends Shaping the Future of Asset Management

As the industry works to cope with new regulation, wades through an outpouring of new products, learns to satisfy investors’ shifting priorities and manages the active-passive debate, the viability of business units will be questioned, and at times radical measures will be taken. Peter Hopkins

6. 5 Ways Advisors Leave Money on the Table, and What to Do About It

My hope is that this article points out some opportunities for you to make more money and serve your clients at a higher level and that you decide to do something about it. — Bill Bachrach

7. The Market Has Gone Wild! Is It Time to Change Your Investment Strategy?

Whether the market is flying high or taunting your emotions with new lows and some bumpy volatility, here are four things every investor should keep in mind ... — Lauren Klein

8. How to Deepen Client Relations and Capture New Business Using Engaging Content

Why financial advisors NEED to understand much more clearly the power of good digital market. With tools like AdvisorStream, it’s easier than ever to get the content you need to drive leads and referrals today! — Kirk Lowe and Matt Halloran

9. Three Ways The Most Successful Gain Big Attention

How do some firms and ideas go from nowhere to everywhere in a few short months? All of a sudden a restaurant becomes popular, a gas station gains a cult following, or a Broadway show becomes too popular to get a ticket for years. — Maribeth Kuzmeski

10. Who Are the Hottest FinTech Firms and Influencers Around the World?

"Worldwide, $27.4 billion poured into fintech startups in 2017, Accenture reports, up 18% from 2016. With so much in play, it’s not surprising that 22 companies are new on this, the third edition of our list."  — Chris Skinner

11. The New Stock Market Normal Is Not What You Think!

Many sensational headlines have been written the past few weeks about market declines, but two things have increased for sure: the viewership and the ad revenues of financial media organizations — Preston McSwain​​​​​​​

Douglas Heikkinen
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IRIS Co-Founder and Producer of Perspective—a personal look at the industry, and notables who share what they’ve learned, regretted, won, lost and what continues ... Click for full bio