The Importance of Diversification

Over the past year or so, there has been a lot of talk about technology stocks and, in particular, the FAANG (Facebook, Apple, Amazon, Netflix, Alphabet – Formerly Google) stocks and how they have significantly outperformed the market as a whole. Year to date FAANG stocks have returned an average of 28.1%, while the Dow (non-tech) has returned about 8.4% (numbers as of close July 13, 2017). It can be easy to get caught in the moment and enamoured with the potential for high returns, but it is times like these that we would like to emphasize the importance of maintaining a diversified portfolio that aligns with your risk tolerance and longer term investment goals.

In any given year, no one can know in advance, with certainty, the sector or asset class that will outperform the rest of the market. If you were to put too much weight in any one sector or class with the hope it will be that outperformer, you could end up with disappointing results. For the same reason that no one can know the winners of the year with certainty, no one can predict the unexpected events and news that can affect some assets more than others. Since unexpected news tends to affect some asset classes more than others, a well diversified portfolio can help stabilize your returns through periods of uncertainty. In our experience, a diversified portfolio is more likely to achieve consistent returns and grow your portfolio over the long-term since it may benefit from growth across many different asset classes.

Of course, hedging your portfolio risk could also mean that you may underperform the market at times. It is important that investors keep in mind that diversification is often times a long-term benefit and when comparing your returns on a short-term basis with an index like the S&P 500, you may be comparing apples to oranges, as the investment allocation may be significantly different.
An example of how a diversified portfolio can provide more consistent returns over longer periods of time can be found on the next page. In this example, we’re comparing a Moderate Growth and Income portfolio allocation to simple indexes and asset classes. As you can see, the Moderate Growth and Income strategy remains very steady in terms of its relative performance compared to the simple asset classes.

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Diversified Portfolio Quilt

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How We Help You Diversify

Collins Investment Group is constantly working to ensure that you have a properly diversified portfolio that aligns with your investment objectives and time horizon. Part of this process is making adjustments based on any personal changes in your life that may have an impact. Another important aspect is rebalancing your portfolio’s allocation to take advantage of profits from asset classes that have out-performed and topping up those that may have underperformed.

Due to the very strong market so far in 2017, we believe that this may be a good opportunity to consider taking profits and rebalancing your portfolio. Please give us a call to discuss your portfolio in further detail and determine whether this is an appropriate strategy for you.

The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Statistical information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Asset allocation and diversification cannot eliminate the risk of fluctuating prices and uncertain returns nor can they guarantee profit or protect against loss in declining markets. Past performance is no guarantee of future results.

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Collins Investment Group is a separate entity from WFAFN.