By SJS Investment Services Managing Director & Senior Advisor Jennifer Smiljanich, CFP®.
We believe that diversification is one of the foundational principles of investing. While many of us might have a favorite stock or two, it is not ideal for most of us to invest in just a few names or in particular parts of the market, such as sectors, countries, or regions. While concentrating portfolios may certainly be a way to create wealth, it also concentrates risk.
Rather, if your concern is to protect your investments, reducing risk by investing across a broad spectrum of asset types may be the better strategy. American film producer Jerry Bruckheimer may have said it best:[1]
I mean if you put all of your eggs in one basket, boy, and that thing blows up you've got a real problem.
Film-making aside, as investors, we know that it is difficult to be able to predict the best part of the market to invest in over any length of time. Case in point, who would have predicted the strong US stock market performance of 2020, especially if we go back to March of last year?[2] While history has shown that US stock markets (as represented by the S&P 500 Index) have handily outperformed international developed markets (as represented by the MSCI EAFE Index) in nine of the last eleven calendar years, we may be due for a sea change. From 2002-2009, it was international stock markets that outpaced US stock markets.[2]
![Source: Morningstar, as of 31-Dec-2020. See Important Disclosure Information.[2]](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1618255474909-GOWAEJMDJW2GEKK4BV51/2021.04.13+Returns+-+S%26P+500+and+MSCI+EAFE+Index.JPG)
Source: Morningstar, as of 31-Dec-2020. See Important Disclosure Information.[2]
Another potential benefit of global diversification is exposure to different currencies. Diversified currency exposure can protect your portfolio from unexpected risks, such as inflation. Given the start of a weakening dollar, international markets might again take the lead in the performance race. When the US dollar weakens, international stocks are worth more in US dollar terms. This was generally true from 2001-2010, when the international markets last experienced their stretch of outperformance.[3]
![Source: “U.S. Dollar Index (DXY)”. Wall Street Journal, 30-Mar-2021, wsj.com. See Important Disclosure Information.[3]](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1618255547651-3O2T0CX5NQL5EHOQCTKM/2021.04.13+US+Dollar+Index.JPG)
Source: “U.S. Dollar Index (DXY)”. Wall Street Journal, 30-Mar-2021, wsj.com. See Important Disclosure Information.[3]
As we enter the modified “Awards Season,” cinema buffs may recall the 2020 Oscar for Best Picture went to the foreign film Parasite, which became the first non-English language film to win the Academy Award for Best Picture.[4] Could this be a coincidental foreshadowing of what’s to come in the markets? We’ll have to wait and see what the envelope holds! But know that you can sit back, relax, and enjoy the show, knowing that your MarketPlus Portfolio is well diversified and strives to be positioned for whatever the future brings.
Important Disclosure Information & Sources:
[1] “Jerry Bruckheimer Quotes”. quote.org.
[2] Morningstar, as of 31-Dec-2020. The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States. The MSCI EAFE GR USD Index is a free float-adjusted market-capitalization-weighted index that measures the performance of the large and mid cap segments of developed markets, excluding the US & Canada equity securities.
[3] “U.S. Dollar Index (DXY)”. Wall Street Journal, 30-Mar-2021, wsj.com. The U.S. Dollar Index (USDX, DXY, DX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.
[4] “Parasite (2019 film)”. Wikipedia, en.wikipedia.org.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
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