Diversification Isn’t Enough

Mar 2020

Concerns surrounding coronavirus have brought one of history’s longest bull markets to an end. Now, investors are worried about the current market correction and the impact it is having on their portfolios. This raises the question — does diversification provide enough protection during significant market declines?

Diversification is the primary tool Traditional Investment Managers use to reduce risk. The theory is by combining non-correlated assets like stocks, bonds and alternatives (gold, real estate, commodities, etc.) you will minimize the impact of major market declines. However, in practice this has not always worked. As a result, the long-term strategy to buy and hold a diversified portfolio hasn’t worked for many investors who were unable to stay the course through significant losses.

Everyone has a plan until they get punched in the mouth.

- Mike Tyson

How Safe is “Balanced” Really?

Let’s consider a traditional “Balanced” portfolio comprised of 35% US Stocks, 15% International Stocks, 40% US intermediate term government bonds and 10% 30-day US Treasury bills. As you can see in the chart below, this “moderate risk” portfolio lost 40% over its worst twelve months — an outcome most investors might not expect from a Balanced portfolio.

Moving forward, with interest rates at historic lows, we could be setting up for a scenario where Stocks and Bonds face a major correction at the same time — further questioning the validity of diversification as the sole source of risk management.

Historical Returns for Traditional Industry Portfolios

Source: Fidelity Investments, Morningstar, 1926-2018. Domestic stocks are represented by the S&P 500® Index, bonds are represented by US intermediate-term government bonds, and short-term assets are based on the 30-day US Treasury bill. Foreign equities are represented by the Morgan Stanley Capital International Europe, Australasia, Far East Index for the period from 1970 to the last calendar year. Foreign equities prior to 1970 are represented by the S&P 500® Index.

You Deserve Better

At Blue Square, a well-diversified portfolio is only the first step in the process of managing risk and volatility. The second is our active risk management which utilizes a proprietary technology and rules-based approach to position portfolios defensively during significant market declines.

By systematically raising cash during these periods and then investing it when markets are more accommodating, we aim to create a less volatile investment experience, and ultimately deliver better risk-adjusted returns over full market cycles.

Blue Square Wealth is a SEC-Registered Investment Adviser. A copy of the Firm’s Current Disclosure Brochures can be found on the SEC’s IAPD site or may be requested at any time by contacting us. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Securities and Exchange Commission.

All investment strategies have the potential for profit or loss; changes in investment strategies, contributions or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio. Past performance is not indicative of future returns.

Significant risk may accompany investments in stocks, bonds or other asset classes over short periods of time. Investment return and principal value will fluctuate with changes in market conditions. Your investment may be worth more or less than your original cost. Past performance is not indicative of future results.

This blog is a publication of Blue Square Wealth. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of subjects discussed. All expressions of opinion reflect judgment of author as of date of publication and are subject to change. Information contained herein does not involve rendering of investment advice. A professional adviser should be consulted before implementing any of strategies presented. Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell securities mentioned herein. Different types of investments involve varying degrees of risk. Economic factors, market conditions, and investment strategies will affect performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements relating to objectives, opportunities, and future performance of U.S. markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “should,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to economic conditions, changing levels of competition in industries and markets, changes in interest rates, and other economic, governmental, regulatory and other factors affecting a portfolio’s operations that could cause results to differ materially from projected results. Such statements are forward-looking in nature and involve known and unknown risks, uncertainties and factors, actual results may differ materially from those reflected in forward-looking statements. Investors cautioned not to place undue reliance on forward-looking statements / examples. None of Blue Square Wealth or any affiliates, principals nor any other individual / entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.