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Two Guidelines for Investing: Be Patient and Diversify

Realizing your investment goals takes time. Warren Buffett famously remarked, “Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant.” While this comment is somewhat tongue-in-cheek, the premise of staying the course for the long-term when investing should not be overlooked. Investors should write out and review goals at least annually. More visual people can use images or physical objects to help them focus on reaching their investment goals. Ultimately, you as an investor need to have a method to keep yourself focused on the long-term objective.

Given the ever-present volatility in financial markets, which can create painful unrealized and realized losses in our portfolios, it is easy for investors to become distracted by transitory price shocks and shift to myopic thinking. For example, wanting to withdrawal all your money during a down market is a natural reaction. Instead, use a systematic, strategic investment plan (e.g. a 401K account*) and diversify the holdings to put the odds in your favor for earning a positive compounded rate of return. In other words, continue to invest regularly. History has shown it pays to stay the course.

Diversification is an investment concept popularized by Harry Markowitz, the creator of Modern Portfolio Theory (MPT).** In essence, diversification is a risk mitigation tool. The basic argument for diversification suggests that as one investment in a portfolio begins to underperform another will pick up the slack. For example, in most market environments when bonds are outperforming stocks typically are lagging. Holding a balanced portfolio with a mixture of stocks and bonds (e.g. a typical 60% stock 40% bond portfolio) is a good practice for long-term investors. In doing so, no one particular asset class will negatively impact an investor’s savings too much.

Sir John Templeton advised investors, “To avoid having all your eggs in the wrong basket at the wrong time, every investor should diversify. Diversification should be the corner stone of your investment program.” Using diversification can help smooth out any market fluctuations in your portfolio.

Your best bet will be to maintain a patient, long-term mindset and employ a method of diversification to minimize the downside risk to your portfolio.

As always, please do not hesitate to ask any questions. Thanks for reading.

JD

*See here for the post entitled “The Benefits of Participating in Your Company’s 401K Program” for more information on this investment vehicle.


**Reference the link here to read “How Does a Robo-Advisor Work for the Individual Investor?” for a look at the application of MPT. 
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