The fourth installment of our series on 7 Principles of Long-Term Investing is related to the last. In fact, one could look at it as the other side of the Don’t Follow the Crowd coin. However, it is a warning to avoid becoming myopic about your own investments by remaining flexible and diversified.
Before we dive into the subject at hand, be sure to read, or reread, the first three installments here, here and here. Also, remember that you are in this for the long haul and the total return on your investments is what’s paramount.
Markets are volatile. And much of the volatility comes from variables beyond anyone’s control. If you have any questions, look at wild swings caused by the pandemic of 2020 and wide variety of actions taken by governments across the globe. No one predicted 2020 and its effects will be felt, potentially, for years to come.
Smart investors will use 2020 as an opportunity to learn about, or remind themselves, of the importance of keeping their portfolios flexible and diversified.
We were taught the same lesson when the dotcom bubble burst in the 1990’s. Hundreds of thousands, if not millions of investors lost everything they had because they put everything they had on technology and internet startups. That level of risk is not good if you are 25 and certainly not when you are approaching retirement age.
Regardless of your age, you should reduce risk in your portfolio by including a variety of quality investments including stocks, bonds, international securities and a few alternative investments if they are supported by your risk tolerance and goals.
Even the most prudent investor with a highly diversified portfolio faces risks. It’s is the nature of the beast. That is why the second point; flexibility is so important.
Flexibility should be built into your diversification strategy. There are several ways to diversify your portfolio, but the most common are by industry, by risk tolerance, by country and by investment type.
When the bubble burst in the 1990’s the magnitude of the losses came on the heels of people leveraging flexibility to move dollars into a single industry. Many did the same in 2020 as pharmaceutical and other healthcare related companies were put in the spotlight because of the COVID pandemic.
If you diversify correctly, you can still take advantage of the market changes we saw last year and in the 90’s without putting your portfolio at risk. The easiest way is to keep enough cash on hand to take advantage as the investment opportunities present themselves.
If nothing else, it is important to remember that there is no one type of investment that is always best. Every type of investment, from corporate bonds, to treasuries, to blue chips, to small-cap stocks and so on will have their day in the sun and your portfolio should have enough diversification that some will be up while others are down.
Remember, investing is a long-term play. You are not in it to make a quick buck and get out.