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Is Your Portfolio Diversified for the COVID Crisis?
A second chance for investors
By: Bob DiMeo, Chief Executive Officer
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Until recently, you must have been disappointed if you did the right thing by building a thoughtfully diversified portfolio. While you were patient and prudent, stocks rose in nearly unabated fashion from 2009 until the pandemic took root in the U.S., resulting in the swiftest move to bear market territory in history. Moreover, March was the most volatile month ever for stocks!
Beyond genuine health and economic concerns, truthful investors admit they were incredibly concerned and shocked by rapid losses in their portfolio, even more so if they lacked diversification. Then almost as suddenly as markets plunged, they staged an implausible comeback. Large cap stocks, small cap stocks, high yield bonds… seems like every risk-on asset participated in the rally (as of this writing the NASDAQ is actually in positive territory for the year).
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Affirm or add thoughtful diversification
Stocks were hammered in the first quarter but there were places to hide, or at least buffer losses.
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However with the S&P 500, the Dow Jones Industrial Average and The NASDAQ Composite all rallying more than 30 percent from their March 23 lows, investors might become complacent, and that could prove costly.
Tips for diversified investors – First off kudos, during the crushing downturn your portfolio likely outperformed on a relative basis. Your conviction in thoughtful diversification (after a 10+ year test following the financial crisis) is bolstered. Our advice to you: maintain your discipline of prudent diversification and be smart in
rebalancing your portfolio.
A second chance for investors lacking diversification – In a way you dodged a bullet. Sure, your portfolio is down, but not nearly as much as just a short time ago. It could be more important than ever for you to embrace these three tenets of diversification:
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1. Except for the most aggressive investors, most of us seek to minimize our maximum regrets. This means foregoing an attempt to stretch for the absolute highest possible returns and instead adopt a strategy that provides a fighting chance of achieving our financial goals, with a smoother path.
2. The Low Volatility Dividend – Contrary to popular opinion, great sums are often accumulated not by gaining more in bull markets, but by losing less in downturns. My colleagues produced exceptional analysis on this topic some years ago with the essence being: if an investment drops 50 percent, it has to gain 100 percent simply to breakeven. A portfolio that protects against steep declines can outperform over time, even if that same portfolio may not shine in roaring up markets.
3. Own a portfolio you can stick with – This one is simple. If your portfolio lacks diversification and the recent plunge made you a nervous wreck, do not allow the rebound to blur your memory. Humans are hardwired to fear loss more than we appreciate gains. It makes no sense to own an aggressive, non-diversified portfolio if you are going to dump investments at their lows.
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To me, the charts below illuminate the need for portfolio diversification. The U.S. just experienced a record period of job losses, and yet stocks rallied as though the all-clear was signaled. Which chart should investors believe? Your guess is as good as mine and only time will tell… that’s why diversification matters.
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No one knows when a solve for COVID-19 will surface nor if remarkable recent equity performance is warranted, or simply a bear market bounce. If you own a diversified portfolio, maintain your discipline. If your portfolio lacks diversification, you have a second chance. You might not receive a third.
In response to the crisis, we are offering complimentary portfolio stress tests and other analytics to prospective clients. For details, contact any of the professionals at DiMeo Schneider.
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i U.S. Large Cap: S&P 500 Total Return Index - U.S. Small Cap : Russell 2000 Total Return Index - U.S. Small Cap : Russell 2000 Total Return Index - Hedge Funds: Hedge Fund Research HFRI Fund of Funds Composite Index
ii Wall Street Journal - performance through May 8
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| This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources which are believed though not guaranteed to be accurate. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Past performance does not indicate future performance. This paper does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.
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