Diversification vs. uncertainty, noise
Joel Dresang: Marc, you very regularly meet with your clients and talk about their investment portfolios and their financial plans. So you’ve got thousands of hours of discussing investment matters with clients. So what have you learned from all of those hours of experience that you think other investors could learn from?
Marc Amateis: Joel, one of the first things that almost every client asks me when we sit down to discuss their portfolio is, “Marc, where do you think the markets are going? How are we going to do this year?” And I tell them nobody knows for sure. And I’ll give you a perfect example.
Every month, Bloomberg surveys economists on where they think interest rates will be headed. And six months ago, 67 out of 67 economists said interest rates are going to rise. And guess what? All 67 of those economists were wrong. Interest rates are lower now than they were six months ago.
I always make sure that clients understand that they can’t listen to all the outside noise. Don’t just believe the experts. Set up a proper investment portfolio and take a long-term perspective.
Joel: Marc, you’re involved in long-term investing, and yet we’re in a marketplace where we’ve got 24-hour financial networks, we’ve got non-stop Internet coverage. So, how do you reconcile that with clients – between the long-term investing and the short-term mentality?
Marc: Investors need to always remember that the purpose of investing is to build wealth. It’s not to entertain. It’s not to relieve boredom. It’s not to just do something for the sake of doing something.
Sometimes, the best action is to do nothing at all. That in itself is making a decision. Now, that’s not to say that we take a hands-off approach. We don’t. But if we’re going to do something, there’s going to be a reason for it.
Joel: You talk about diversified portfolios. To me, what that says is sometimes this part of the investments are going up, and this part might be going down. How do clients deal with that?
Marc: You know, nobody likes to see their investments decline in value. But truthfully, you want to see some things going in a different direction than other things in your portfolio.
You want investments that will hold up when other investments are going down. So by definition that probably means they’re going to perform more poorly when those other investments do well.
Joel: And the diversification helps control risk.
Marc: That’s right. That’s how you control risk in an investment portfolio. There’s something that we deal with a lot called correlation – how certain asset classes move relative to each other.
So what you want to see is a portfolio where you’re going to have some investments that lag while others move ahead nicely. Don’t take that as a negative. Look at that as a positive. It probably means you have better diversification in your portfolio when you see those different asset classes moving more independently of each other.
Joel: And getting back to what you said before, if we don’t know exactly what’s going to be going on with the economy, it’s nice to have things that move in different ways.
Marc: That’s exactly right. It means that you don’t have to guess right all the time. You can set up a proper portfolio where you’re going to do well when the markets move higher, but you’re also going to be protected on the downside when things inevitably go the other way.
Marc Amateis is a vice president and investment advisor at Landaas & Company.
To learn more about how correlation helps investors balance portfolios, please click here, for a Money Talk Video with Kyle Tetting.
Money Talk Video by Peter May
(initially posted Dec. 19, 2014)
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