Portfolio risk control management
Individual commitment to a group effort - that is what makes a team work, a company work, a society work, a civilization work. – Vince Lombardi
It’s that time of the year, in the freezing-cold middle of the night, when I fire up the barbecue and cook some wings and all-beef hot dogs. I’m already getting that queasy feeling just thinking about eating those delicacies at 2 a.m. while watching the Super Bowl.
It’s Super Bowl weekend, after all, and after non-stop hype over the last few weeks, the big game is just about to kick off. With all that’s going on in Israel – the war with Hamas and the heating up of the northern border– a couple of hours of escape through sports is just what the doctor ordered. The biggest storyline of the game is whether the Kansas City Chiefs can win their third Super Bowl in the last five years.
That’s an accomplishment that’s been done only three times in the past, and it would cement the team as a dynasty and their quarterback, Patrick Mahomes, as potentially the greatest of all time.
Retired legend Tom Brady, the quarterback who won the Super Bowl in three out of five years and the one that I think is the greatest of all time, once said before the big game, “I just love working hard. I love being part of a team; I love working toward a common goal.”
In today’s statistically driven world of sports, this is unusual. Time after time, you see players, seemingly driven by putting up gaudy statistics and in turn earning unbelievably huge contracts, focused on themselves. They lose sight of the goal: winning. In contrast, Brady, who was not a great athlete and wasn’t heralded coming out of college, worked so much harder and was more driven to win than anyone else, and he put the good of the team first and foremost. And boy, has he managed to win Super Bowls!
It’s that reliance on a team effort that I would like to focus on vis-à-vis your investment portfolio.
Football is the definition of a team game. There are three aspects to a football game: offense, defense, and special teams. If even one of those three is weak, the chance of success is limited.
In other words, you need a diversified team approach to achieve ultimate success. While there are a couple of stars, both teams in this year’s game personify the total team approach. They are both teams with solid players that work together as their recipe for success.
It’s this same diversification that is key to managing risk in your investment portfolio.
Not 100%
There are those professionals who believe that diversification is the magic sauce for ensuring that you won’t lose money. Well, that is just not true. Investors who diversify can lose money, just like anyone else.
According to Morningstar, “having a diversified portfolio doesn’t mean you’ll never lose money. Diversification doesn’t mean complete protection from short-term dips or market shocks. Diversification does not guarantee that if one investment goes down, another investment will go up; it isn’t a seesaw.”
Since I began this article talking about hot dogs and wings, let me continue with the food analogy to explain the concept of diversification.
Let’s say you have some friends coming over for a Shabbat meal. Would you serve only roast beef or chicken wings to your guests?
Doubtful—certainly, not in my house. Even for those of us meat lovers, we would expect some salad, vegetables, drinks, and desserts to be served as well, and, of course, some tea to wash it all down. You want your Shabbat meal to be successful, and as such, you need a well-rounded menu.
If diversification is good enough for winning the Super Bowl and for successful entertaining, it must be a good way to invest.
What is diversification? It is an investment approach that uses many varied investments within a portfolio.
The theory states that a portfolio of different kinds of investments will, on average, yield higher returns and pose lower risk than any one individual investment.
It is a way to smooth out volatility in a portfolio caused by market, interest rate, currency, and geopolitical risks. In layman’s terms, don’t put all your eggs in one basket.
Steadier approach
The whole point of diversifying is to lower the risk in a portfolio. For most investors, a slow and steady approach is the path to financial success.
After two years of extreme ups and downs in the market, now is a great time to review your portfolio and see if you are too heavily weighted in just a few investments.
If so, you may be able to benefit from proper diversification to help improve returns and lower your risk.
Retirement GPS: How to Navigate Your Way to a Secure Financial Future with Global Investing.