Why Diversification Is Still Our Favorite Strategy

I don’t know about you, but I’ve never heard someone at a cocktail party brag about the steady, consistent returns they’ve enjoyed from their well-diversified mutual fund investments. We are also acutely aware that our diversified investing strategy isn’t always “sexy,” but as financial advisors, we believe in the power of the long-term growth of the market, despite the inevitable downturns along the way. We understand the excitement of investing in companies you believe will possibly outperform the market. Many folks engage in such investments on a personal level. However, when it comes to your life savings, we strongly recommend keeping exposure to individual stocks below 5% of your overall portfolio. Think of it like a “play” account—money you can afford to risk without jeopardizing your overall financial security.

Take the recent case of Wolfspeed, a popular semiconductor company based in Durham, NC. Wolfspeed generated significant buzz in our local community, particularly with its plan to build a state-of-the-art factory in Siler City. Many people here in North Carolina were excited about this clean energy company and eager to invest. Unfortunately, last month, Wolfspeed announced they may be filing for bankruptcy, and many investors faced substantial losses. The stock is down 95%. This serves as a stark reminder of why we stress the importance of diversification—relying on any one stock to grow your wealth, even one you wholeheartedly believe in, can expose you to significant, unexpected risks and set you back from your financial goals.

As financial advisors, we do not claim to know exactly what the market will do in the short term. We can’t predict daily fluctuations or how the next quarter will unfold. Instead of focusing on short-term market timing, we rely on the motivation of companies to innovate and generate profits and grow. Over the long term, it's these profits and growth that drive the company’s value, not short-term fluctuations. Even with inevitable short-term setbacks, we remain confident that, in the long run, the market will rise on the strength of these companies.

Diversification is one of the most effective strategies for reducing risk and smoothing out the volatility of your investment portfolio. Diversification spreads your investments across a variety of asset classes, sectors, and geographies so that you’re well-positioned to absorb shocks from any one investment or market sector. When one sector underperforms, another may be doing well, helping to balance out overall performance. A diversified portfolio is more likely to provide stable returns over time and is less vulnerable to the ups and downs of any individual company.

Many investors are unaware that this year, global markets have shown the largest growth in value. Despite geopolitical tensions and ongoing conflicts—such as the Israel-Palestine and Ukraine-Russia situations—international markets and emerging economies have delivered impressive returns. For example, as of May 31, Dimensional Fund Advisors (DFA) international holding (DFIC) is up 18% year-to-date, and emerging markets (DFEM) are up over 7%. It’s been a surprise to many given the global instability. By investing outside of just the U.S. or a single region, you open your portfolio to growth opportunities in places where markets may not be directly impacted by domestic factors. Diversification is a way to capitalize on global trends, even when local markets are volatile or unpredictable.

If you’re interested in exploring how diversification strengthens your investment strategy, reach out! We’re here to help guide you in building a portfolio that aligns with your goals.