We think Wayne had it right…we hope you do too…

Wayne Gretzky (for those of you who are not hockey aficionados…arguably the greatest hockey player of all time) is famous for his quote “I skate to where the puck is going to be, not where it has been”.   We use the same approach in portfolio construction where constant analysis of the markets, the economic macro environment and government policy give us directional, although not certain, indications of market shifts. The narrow market concentration in technology we see now is driving “FOMO”, i.e., the fear of missing out, and encouraging investors to concentrate into the technology sector.  Investors may believe that investing via a fund that is representative of the S&P 500 index is being diversified, when in fact, as of this writing, the top five stocks (all technology) in the S&P 500 make up 26% of the entire index.  That kind of dominance will mean, as go these top five names, so goes the entire index.  This reinforces the critical importance of maintaining a diversified portfolio.  It is not always easy for investors to understand that when the index is posting outsized returns, and their diversified portfolios are lagging since by design they have less than 100% alignment with the index, that as with the diet and exercise they may not like, for their long-term (financial) health, diversifying is a necessary discipline.

In 2019 Blackrock published an interesting article entitled “S&P Envy”.  This coincided with a 10-year run by the S&P 500 where it posted a 351% total return, and over the same period a diversified portfolio* had posted a 192% return.  We suspect they published this piece in reaction to clients’ concerns their portfolios were not keeping up with the index.  But, if we pull the lens back and look at the entire period of the study, from 2000-2019, we see periods like 2000-2002 where the index was down 40%...or 2008 where the index was down 37%.  During these same periods, the diversified portfolio was down only 19% and 24% respectively.  Not a comfortable drawdown for most clients, but being down 40% can put many clients into a total panic.  And, by the way, at the end of the 19-year period, the diversified portfolio prevailed with the higher total return. 

We spend hundreds of hours every year (so you don’t have to) reading research, attending seminars, webinars and conferences to stay abreast of the tools and techniques which can assist our clients manage the everchanging environment their financial goals have to operate in. 

Our approach is in building portfolios that are broad-based and not dependent on any single sector, style, or asset class. Diversification, in our strategy, is not simply a defensive measure used to minimize downside risk; it is a proactive, tactical strategy that seeks to position the portfolio to participate in opportunities and mitigate risks.  As  historic market dynamics have shown, leadership in the markets can and do change, often when it is least expected. 

We recognize that headlines always have, and always will, focus on volatility and uncertainty—questioning the trajectory of U.S. growth, economics and policy.  But history also demonstrates that as the economic markets change, along with investors interpretation of them, so does market leadership.  We continue to advocate a broadly diversified portfolio with tactical tilts toward opportunistic or defensive sectors and asset classes give investors the best chance to navigate these transitions successfully.

* Diversified Portfolio: (40% S&P500 Index,15% MSCI EAFE Index,5% Russell 2000 Index,30% Bloomberg Barclay Agg Index,10% Bloomberg Barclay’s US Corp High Yield Index)

-Dave & Drew