In part one of this two part series, we provided a real life mathematical example as to why diversification was important to wealth accumulation.
In this installment, we will provide a more detailed explanation of true diversification and why our approach at FAI is very diﬀerent from others in the industry.
In order to define the FAI approach to diversification it is important to understand many misperceptions of what constitutes diversification. One investor misperception suggests that in order to diversify, one must own diﬀerent geographic regions or diﬀerent business sectors. This doesn’t guarantee diversification as many investments in diﬀerent geographies or sectors are driven by the same economic, political or business variables. For example, most investors would argue that owning stocks in two diﬀerent sectors such as Technology and Consumer Discretionary should help diversify a portfolio. Surely stocks like IBM, Automatic Data Processing, Applied Materials and Citrix Systems shouldn’t act the same way as McDonalds, Target, Carnival Cruise Lines and General Motors. Or should they? Below is the chart of the performance of the Technology and Consumer Discretionary sectors over the last 10 years. As you can see, they are almost 98% correlated over this time frame. Owning stocks in both did not necessarily provide portfolios with any diversification benefits.
Life is a series of transitions — natural and unexpected life events like retirement, the sale of a business, mid-life marriage, mid-life divorce, career change, and the need to care for our aging parents.
Does your financial plan include these transitions? If not, we have a great way to get you headed down the right path:
The journey to financial independence can seem overwhelming.
That’s why we created our “Guide to Getting Started” to help you through the process, serving as a roadmap so you know what to expect as we work together. We’ll be with you every step of the way — supporting when you need support, educating when you need education, and advising when you need advice.
*Please Note: The scope of any financial planning and consulting services to be provided depends upon the request and needs of the client. FAI Wealth Management does not serve as an attorney, accountant, or insurance agent. FAI does not prepare estate planning documents or tax returns, nor does it sell insurance products.