In the 1967 movie "The Graduate," a family friend offers young Benjamin Braddock advice: "Plastics . . . There's a great future in plastics."
That may or may not have been good career advice in the late '60s. But for investors, focusing on a single industry sector or asset class has generally been a bad idea. In today's market — with the aging of the bull market and its increasing volatility — we believe diversification is an especially important consideration.
Where we are now
The current bull market, now running for nine years, doesn't show any signs of ending in the near term, says Chris Haverland, Senior Vice President – Global Asset Allocation Strategist at Wells Fargo Investment Institute. But that doesn't mean it will go up and in a straight line. In fact, the ups and downs of the markets are likely to continue to generate headlines as we move through the year.
"Volatility likely will remain elevated in the near term," Haverland says.
We believe investors should consider these two strategies as they strive to meet their financial goals:
- Diversify. Diversification remains an effective strategy that can help smooth out the jagged ups and downs of the market. Spreading investments across multiple assets classes, such as stocks and bonds, and across different sectors of the economy gives you the potential to profit from growth in different segments of the financial markets.
- Rebalance. Getting into the habit of reviewing your portfolio on a regular basis, such as twice a year, can help you identify opportunities to rebalance. When there are big swings in the market or when something significant has changed or you have experienced a major life event, such as a career change, a change in marital status, or the birth of a child, it should be a signal to check your portfolio and rebalance if needed. That typically means selling assets that have grown to represent too big a share of the overall portfolio and buying others that are underrepresented.
"At Wells Fargo Investment Institute, we believe that it makes sense to buy equities on meaningful dips and rebalance portfolios regularly to take advantage of asset-class prices that have gone on sale," Haverland says.
"Volatility likely will remain elevated in the near term." — Chris Haverland, Senior Vice President – Global Asset Allocation Strategist, Wells Fargo Investment Institute
What lies ahead: Diversification and recession protection
Haverland and his colleagues at Wells Fargo Investment Institute aren't expecting a recession this year, but the current cycle of economic growth is already one of the longest on record. No one can say for certain when it will end.
Diversification is one way to help manage risk during a market downturn that will accompany a recession. To get the full benefits, however, your portfolio needs to be diversified before any such downturn.
"A diversified portfolio's most important benefit may be that it can help mitigate the effects of unanticipated risks," Haverland says. "Unexpected events can happen and such developments typically affect some assets more than others."
During periods of calmer markets, a diversified portfolio may not get returns quite as high as the overall market. But over long periods of time that include both bull and bear markets, we believe diversified portfolios can help investors achieve their financial goals, Haverland says.
Know your diversification options
Any investor can construct a diversified portfolio, even if it's made up of only publicly traded stocks and bonds. But high-net-worth investors may have additional choices, Haverland notes.
"These investors may have less need for liquidity or may meet certain thresholds for alternative products, allowing for a wider array of strategies to choose among," he says.
For example, many alternative investments can't be liquidated as quickly as securities traded on public exchanges. That means an investor's money is invested for longer periods. But for high-net-worth individuals who can safely go without access to their funds for several years, an investment professional may recommend some of alternative products to further diversify an overall portfolio.
Regardless of particular investment choices, though, we believe diversification is a key strategy.
"We believe employing a diversified strategic asset allocation based on investor goals and risk tolerance, along with regular rebalancing, offers the optimal approach for investors over the long term," Haverland says.