- Nothing goes up forever or down forever. Instead, all investments go through cycles of outperforming and underperforming each other. We just don’t know when. (See fact #1)
If these are facts, then logic tells us the best course of action is to spread our wealth over all these investments and be patient. Every year, we’ll own the winners- and some of the losers. This diversification has the wonderful benefit of smoothing out your returns year in and year out. The best analogy we can offer is the Dames Point Bridge in Jacksonville. It spans the St John’s River at an impressive 175 feet high. The bridge has six lanes for traffic. It also has guardrails to keep you from driving off the bridge to an unpleasant end. So, a question: If it didn’t have any guardrails, which lane would you use to get across the river?
If you’re logical, you’d drive straight across the middle of the bridge. Well, that’s what diversification does for your portfolio. If you think of investments as the traffic lanes, some get too close to the edge each year. But by owning them all, you get to enjoy the middle of the investment drive each year. And if the destination is a comfortable retirement, driving across the middle lane just makes sense. This doesn’t guarantee you win every year, but it does make the ride more predictable and safer than betting which lane will get you there faster (“I only want to own US stocks, because they are doing well today.”) – and being wrong about it.
Remember the three principals we espouse over and over: Asset allocation, diversification, and rebalancing. You’re counting on us to get you across the bridge dry and on time. Time has proven these principals will help us all do just that.