Good morning & happy Monday!
“A good portfolio is more than a long list of good stocks, and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.”
– Harry Markowitz, American economist
I have addressed investment diversification in the past, but it is such a critical component of our investment strategy I would like to discuss it again here … but this time I think a story might be an effective way of sharing it.
Super quick review: diversification means investing across a broad range of investments. In our portfolios at Intentional Wealth that means using a combination of stocks and bonds, domestic and international stocks, growth and value stocks, long-term and short-term bonds, just to name a few.
Diversification is the concept of not having all your eggs in one basket.
My dad is a pastor and growing up we lived in a church parsonage, in our case it was a home that was attached to the church facility. This meant that my back yard was the entire church 2-acer property in Auburndale. This much outside play area provided for all sorts of fun opportunities as a kid (way more fun than iPads and video games if you ask me, but I digress).
I’m about 10 years old and I get a boomerang as a gift one year. I was super excited to test it out and with such a big yard and I ran outside and threw it with all my might. It flew out of my hand and landed maybe 20 yards away, petty much in a straight line from where I threw it. Obviously, I was expecting it to boomerang back to me. Undeterred, I threw it again, same result. Again, again, again I threw this boomerang and not a single time was there even a hint of movement that it was curving back towards me.
I was at max frustration and came to the conclusion that I was not throwing it hard enough. So, from the back yard I threw the boomerang with everything I had in the general direction of our house. Well, needless to say, it still did not return, but this time the boomerang landed on the roof of our home.
My problem was I was throwing the boomerang backhanded, like a frisbee, not understanding that a boomerang it to be thrown over-handed. I could keep throwing that boomerang hundreds of times, but throwing it backhanded would continue to have the same result.
Well, with the boomerang on the roof, my 10-year-old mind decided I needed to climb to the top of the roof to get it off (I’m not claiming this was a wise decision). So, I find a way to climb up the roof and grab the boomerang and in frustration I throw it aggressively off the roof. But … this time in my frustration I threw it over-handed and yelled something like “stupid boomerang.”
Ladies and gentlemen, something amazing happened after I threw that boomerang from the roof over-handed … it started coming back towards me. For a split second I was thrilled … I finally learned the secret to getting this boomerang to fly back to me! But my excitement quickly waned as I saw the boomerang was going to hit the side of the house. Well, not only did it hit the side of the house, it flew right through the bathroom window, breaking it with a loud crash.
Within moments my mother, who knew I was outside playing with the boomerang, runs out of the house calling my name. Imagine her surprise when my response comes from the sky. She looks up and sees me on the roof and a broken bathroom window. Needless to say, I had some explaining to do 😉 … and a window to buy from my allowance money!!!
That was maybe my first lesson in diversification. When that boomerang went through that window I had to purchase an entire new window. If there had been multiple window panes, that break would have only broken one of the window panes and the economic pain to me would have been much smaller as I would have only had to replace one of the window panes, not the entire window.
In investing, there are going to be boomerangs that hit investors. It may be war, inflation, economic conditions, politics, companies, industries, circumstances, natural disasters, etc. but diversification is one of the exceptionally important tools we deploy to weather those storms. We have multiple window panes in our investing strategy.
Nick Murray, an advisor of over 50 years, and author of multiple books has stated “Disciplined diversification is the incredibly courageous decision to forego any chance of making a killing, in exchange, for the life-saving blessing of never getting killed.”
I wholeheartedly agree with that thought process and that why we deploy a vigorous diversification strategy at Intentional Wealth.
There are no facts about the future, so diversification provides us with the framework to pursue growth in a structured, balanced way.
As always, we are glad to dive deeper into our selection process and through process around our investment strategies … just say the word 😊
Hope it’s a wonderful week ahead!