The best financial planning advice might just prove to be your worst nightmare, writes Peter Watson
Investors without adequate diversification are at risk under the current stock market volatility. Concentrated positions in companies that do not recover will cause financial harm. Evidence-based investing proves diversification is essential protection for your investment portfolio.
The traditional advice? Continue to hold your investments after a significant loss in value, because they will fully recover. This could backfire.
It can be the best advice or the worst.
Assume investor A has a well-balanced, diversified investment portfolio. The stocks owned are from many different industries, in many different countries.
Strong diversification requires owning a very large number of individual stocks — hundreds of stocks in each investment sector, across many countries, totalling many thousands of stocks.
In effect that investor owns a little bit of everything around the globe.
After a significant market decline, that investor is comforted by safety. As long as there is economic activity in the world, that investor will participate and profit from it.
Investor B took a different approach to investing and held concentrated positions of a few stocks. The motivation would have been to pick specific winners that would outperform.
Does the buy-and-hold theory apply to that investor? Absolutely not.
We encourage you to take an evidence-based approach to investing. Speculating on individual stocks can be risky and, in some cases, very disappointing.
Diversification is your friend.
If you have invested like Investor A, in a broadly diversified portfolio, take comfort that history is on your side. When stock markets recover, your stock portfolio will recover.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI, which is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.
