Worried About Headlines? Make Diversification Your Buddy!

3 Principles to Combat Fear of One Company or Industry

1. Uncertainty Is Unavoidable

Remember that uncertainty is nothing new, and investing comes with risks. Consider the events of the last five years alone: a global pandemic, the Russian invasion of Ukraine, spiking inflation, and ongoing recession fears. It may have seemed as if there were plenty of reasons to panic. Despite these concerns, for the five years ending December 31, 2024, the Russell 3000 Index (a broad market-capitalization-weighted index of public US companies) returned an annualized 13.86%, slightly outpacing its average annualized return of 12.14% since inception in January 1979. The past five years certainly make a case for weathering short-term ups and downs and sticking with your plan.

2. Market Timing Is Futile

Inevitably, when events turn bleak, and headlines warn of worse to come, some investors’ thoughts turn to market timing. The idea of using short-term strategies to avoid near-term pain without missing out on long-term gains is seductive, but research repeatedly demonstrates that timing strategies are not effective. The impact of miscalculating your timing strategy can far outweigh the perceived benefits.

3. Diversification Is Your Buddy

Nobel laureate Merton Miller famously used to say, “Diversification is your buddy.” Thanks to financial innovations over the last century in the form of mutual funds, and later ETFs, most investors can access broadly diversified investment strategies at very low cost. While not all risks—including a systemic risk such as an economic recession—can be diversified away (see Principle 1 above), diversification is still an incredibly effective tool for reducing many risks investors face.

Diversification can reduce the potential pain caused by the poor performance of a single company, industry, or country.¹ The failure of Silicon Valley Bank is a case in point. As of February 28, 2023, Silicon Valley Bank (SVB) represented just 0.04% of the Russell 3000, while regional banks represented approximately 1.70%.² For investors with globally diversified portfolios, exposure to SVB and other US-based regional banks likely was significantly smaller. If buddying up with diversification is part of your investment plan, headline moments can help drive home the long-term benefits of your approach.

When the unexpected happens, many investors feel like they should be doing something with their portfolios. Often, headlines and pundits stoke these sentiments with predictions of more doom and gloom. For the long-term investor, however, planning for what can happen is far more powerful than trying to predict what will happen.

How We Help

Mission Wealth offers tailored guidance to stockholders, assisting them in creating personalized strategies for diversifying assets, securing financial stability, and minimizing market volatility risks.

Joyce L. Franklin, CPA, CFP® is a Partner and Senior Wealth Advisor at Mission Wealth. She advises employees and executives in the tech and human resources industries on wealth management, tax, and financial planning. She designs, implements, and monitors financial plans that coordinate each client’s goals, values, and risk tolerance.

Schedule a consultation to find out if we can add value for you.

Footnotes:

1. Consider that a study of single stock performance in the US from 1927 to 2020 illustrated that the survival of any given stock is far from guaranteed. The study found that on average for 20-year rolling periods, about 18% of US stocks went through a “bad” delisting. The authors note that delisting events can be “good” or “bad” depending on the experience for investors. For example, a stock delisting due to a merger would be a good delist, as the shareholders of that stock would be compensated during the acquisition. On the other hand, a firm that delists due to its deteriorating financial condition would be a bad delist since it is an adverse outcome for investors. Given these results, there is a good case for avoiding concentrated exposure to a single company. Source: “Singled Out: Historical Performance of Individual Stocks” (Dimensional Fund Advisors, 2022).
2. Regional banks weight reflects the weight of the “Regional Banks” GICS Sub-Industry. GICS was developed by and is the exclusive property of MSCI and S&P Dow Jones Indices LLC, a division of S&P Global.