A Rising Tide Lifts All Boats
By Ryan Payne, President
There’s an old saying that “a rising tide lifts all boats,” but the flip side is those same boats all drop when the tide is going out. So if we’re going to invest in the market, even with a conservative approach, volatility over the years is to be expected. But how does that inevitable volatility impact our planning for clients?
Market volatility is inevitable even with a conservative investment philosophy
The best strategy for limiting exposure to volatility is diversification
This is especially important in retirement as you start drawing from your portfolio
It’s an overused term, but “diversification, diversification, diversification.” Especially as you move from the wealth-accumulation stage to the wealth-distribution stage where you start drawing from your portfolio, it’s just common sense that you’d want to limit your exposure to volatility as much as possible.
A perfect example occurred in 2008 and 2009, when some markets went down 40-50 percent. If something like that happened again and you needed to fund a retirement from your portfolio, you could be out of luck. That’s where diversification can really help, and what it means is investing in many different asset classes. I tend to relate a simple analogy that it’s like if you own a farm and live off the land, you don’t want to plant just one type of crop that comes into season at one time of the year.
I’m not a farming expert, but I do know that depending on the year and conditions, some harvests are going to be better than others. So if you live off a farm, you might also have some livestock and many different crops you can pull from at different times. It’s the same concept with a diversified portfolio. As an example, having bonds over the past couple months would have held up really well when markets were very volatile.
If you look at the big correction in the early 2000s when the tech bubble burst, commodities and bonds actually both did really well and value stocks also held up. So the point is you need to know how diversified your portfolio is and the extent of your downside risk. As far as an ebbing tide lowering all boats, that’s exactly what will happen if those boats are all in the same sea. But if you have money spread out, or different crops, or boats in different seas, you can mitigate that risk when certain asset classes go in and out of favor.
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