Stocks Getting Hammered! Did Diversified Portfolio Work for You?

Did you know that many stocks are currently in a BEAR market?

This means they are down more than 20% from their high point.

If your portfolio is littered with these previous high flyers (Apple, Google, Netflix, Facebook or Amazon) you may have been crying between bites during Thanksgiving dinner.

Hopefully, you had many other holdings to help cushion the blow of these stocks getting hammered. That’s what diversification is all about.

Unfortunately, prior to this recent downturn, diversification from US stocks has hurt your portfolio returns. 

For the past several years US stocks have done dramatically better than most other types of investments.

Therefore, your diversified portfolio’s return been lagging the U.S. stock market’s return. 

Blame diversification.

Credit a diversified portfolio for cushioning your portfolio from recent US stock market drops.

By definition, “diversification” means allocating your money across investments that move in different, ideally non-correlated direction. People diversify for several reasons:

1. They don’t put all their marbles in one basket – too risky
2. Winners rotate – it’s impossible to know which type of investment will do best in the near future
3. Minimize losses – your portfolio won’t go down as much as your worst performing investment

All these are prudent reasons to diversify your money. Most diversified portfolios provide for long-term growth and downside protection. In general the larger the stock percentage the more volatility your portfolio will experience. As you can see below, US stocks have been the HUGE winner the past 1 and 5 years.

Thanks to diversification (owning other types of investments) your portfolio has not grown as much as US stocks (S&P 500) over the past several years. 

After several years of seeing US stocks seemingly going straight up, US stocks have recently been going down. Fast.

The FAANG tech stocks that had been leading the way are getting hammered recently:

How far have they dropped from their high?

DIVERSIFICATION HAS BEEN YOUR BEST FRIEND THE PAST FEW WEEKS!

Now that the some stocks are tanking, diversification is shining. While these stocks are temporarily bleeding money, bonds have gone up in value the past week. This cushions the losses in your portfolio quite a bit.

If you choose to sit around and look at your portfolio returns, they will reflect your portfolio diversification. This means that while the past several years, your overall return will lag that of the US stock market.  Over the past few weeks, your portfolio will likely be down quite a bit less than the US stock market assuming you own US bonds and other investments that have not dropped as much or have gone up in value.

Keep in mind that I wrote the article below in Feb. 2018. So now the Dow is back to where it was 9 months ago.

Last Chance to Buy With Dow under 25,000