Diversification is Key to Building Portfolios

Jason Zweig’s latest contribution to the Wall Street Journal is called “Putting the Buy-and-Hold Gospel to the Ultimate Test.” Click here to read the full article.

In the article, he discusses the biggest stock market crash of them all that began in 1929.  The stock market fell 89.2% from peak to trough and, excluding dividends, did not recover for over a quarter century. As Zweig states, “Doesn’t the 1929 crash prove that if you hold stocks long enough, you’re bound to come out ahead? Only if you have the patience of a tortoise and the emotions of a stone.” If you don’t possess those qualities, there is an alternative solution to help you deal with inevitable losses in your portfolio. By holding a diversified portfolio comprised of stocks, bonds and potentially alternatives you can avoid huge losses like those in 1929. In fact, bonds and cash did quite well during the period and no doubt alternatives (if they existed at the time) would have provided additional protection.  So instead of your portfolio losing 89%, it would have likely lost about 30%.

Although still a large loss, those of without the patience of tortoise and the emotions of a stone probably could have avoided panicking and selling at the bottom. Diversification is the key to building portfolios that you can stick with during the bad times.