As a youngster, one of my favorite things to do, was to walk down to the creek after dinner on a summer evening, and watch the bats chase bugs in the twilight sky.
Then my dad would build a fire to sit around, and he would pass along to us the things he thought we ought to know. Those were good times, and I still remember a lot of the conversations.
When the evenings concluded, my two brothers and I would race to the creek with buckets to fetch water to douse the fire.
It always seemed to be a race between us. Being oldest, I had learned that filling the bucket to the brim and trying to run with it would only result in spilling much of the water and slowing me down. I figured that if I only got three quarters of a bucket full, I could make the best time getting to the fire first, and with the most water. This served me well for a long time.
Now that I do investments, some of the same things that I learned back then still serve me well.
If I think of a portfolio as that bucket, and our goal for that portfolio is that fire, most people will agree we want to get to our “fire” with the most possible water in the bucket. That means that we might not “fill” that portfolio bucket with the most aggressive things we can find, and risk spilling too much value from the bucket during the run to the fire (the ups and downs of the markets). As investors, minimizing the spillage can be just as important as filling the bucket.
By diversifying the holdings in a portfolio or owning things that don’t all behave the same way at the same time, it might be possible to pursue market returns on the upside and limit the downside when things aren’t doing too well.
That certainly isn’t as glamorous in bull markets, but when storm clouds come rolling in and things get rough, diversification can potentially be a good friend.
At TVAMP, diversification is one of the things we consider in the construction or review of a portfolio.
Why not ask your advisor how you are doing on diversification? We are happy look at what you are doing and share our thoughts.