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Road Trips and Diversification

Road Trips and Diversification

May 31, 2021
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My wife and I have seven children.  When I share with others that my wife and I have seven children, I joking comment that my hope is that at least one of them will wipe my nose when I get older and can’t do it for myself.  Some may say that, with seven children, I should have a pretty good chance of this becoming a reality (although the children may just pass me around among them). 

Faulk Family at Ellis Island (in the rain)

In 2006 and again in 2010, my wife, seven children and I spent the majority of our summer driving around the country.  We left from our home in California, drove through the southern states to Florida, up the Eastern seaboard and back to California via a northern route.  We started each day expecting to see new sights and having fun.  Although some days we experienced rain and disappointment, I think we can all say, that on average, each day was a good day.

As we prepared for the trip, we spent a lot of time reviewing our goals (the various diverse locations we wanted to see), the best way to accomplish our goals (which roads to take, cities to stay in) and the outcomes we wanted (strengthening family bonds and enjoying our beautiful and diverse country).  Occasionally we faced challenges we did not think we could overcome, but because of our planning, we stayed the course and were able to enjoy this beautiful country full of diverse people and geography. 

 

On our return into the Bay Area during our 2006 trip, I asked the children if they had fun and if they would want to do something like this again.  Somewhat to my surprise, they all said they would do it again (hence why we did something similar in 2010).  Some friends have commented that they have tried long road trips as a family and did not experience the same results.

 

Similar to road trips, many people say they enjoy their investment experience while others don’t.  My experience has shown that those who don’t use an identified investment methodology often find investing to be a frustrating experience.  While an identified investment methodology should be tailored to each individual/family, it will generally include the following:

 

  • An investment plan that fits your needs and risk tolerance
  • Global diversification
  • Manage expenses, turnover and taxes
  • Stay disciplined through market dips and swings
  • Structure the portfolio along the dimensions of expected returns.

 

In previous messages, we discussed staying disciplined through market dips and swings (https://www.montageadvisors.com/blog/speeding-tickets-and-timing-the-market) and structuring the portfolio along the dimensions of expected returns (https://www.montageadvisors.com/blog/marital-bliss-and-dimensions-of-return).  The focus of this message is need for diversification in your investments.

 

During the Go-Go 90’s dot-com stocks were all the rage.  It seemed that virtually any stock that dealt with the internet was booming and, for many, it seemed fairly easy to have spectacular investment returns.  As the 90’s continued into early 2000, I saw many people invest the majority of their investment assets in the technology sector of the economy.  This seemed like a great idea…until the dot-com bust occurred.  The Nasdaq index reached a high of about 5,048 on March 10, 2000.  By October 4, 2002, the Nasdaq index dropped to about 1,139 – resulting in a drop of nearly 77 percent.

 

Many commentators have termed the decade between January 2000 to December 2009 as the “Lost Decade”.  This period of time has been called this for a very simple reason - if you were to have invested $1,000,000 in the S&P 500 Index (representing 500 US companies) on January 1, 2000 and held this for a 10-year time period (through December 2009), your portfolio would have dropped to approximately $910,000 (a negative return over a 10-year period of time). 

 

Conversely, if you were to have invested approximately 30 percent of your assets in international markets and targeted some of the “dimensions of return” (discussed in one of our previous messages), your investment account could have been valued at approximately $2,060,000 during that same time period (see graph below). 

 

To emphasize the point behind the long-term benefit of diversifying globally, among sectors and targeting the “dimensions of return”, see the following graph that demonstrates the benefit for a 48-year time period (1970-2018).

 

The key lesson to learn from these examples is the importance of diversification.  During the dot-com bust, a Nasdaq heavy (technology sector) allocation of your investments experienced significant declines.  During the “Lost Decade”, if someone had proper “global” diversification, they could have experienced a better investment experience.

 

While I love living in the Bay Area, my family’s drive around the country, allowed us to enjoy so much more out of life as we sought diversity in the geography and people that we met along the way.  Similarly, when it comes to our investment experience, greater diversification (i.e. global markets, various sectors of the economy, targeting the dimensions of return, etc.) may provide a richer investment experience. 

 

Lastly, while all of us have different goals (life, family, financial, retirement, etc.) we all have a desire to accomplish them.  I have found that I do a better job accomplishing my goals when they are specifically identified and I create a plan to accomplish them.  I also have found that life will throw us a curveball or two which “allows” us to review our plans to determine if a course correction is needed or to just endure the challenge and press forward.  Sometimes we find ourselves working hard to avoid all problems, when we should accept that life can be difficult, but as long as we have a sound plan in place, we can work through the problems.

Disclosures

 

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