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Diversify and Stay the Course (Why Asset Managers Say It’s So Important)

Asset manager stress the importance of diversifying and avoiding emotion fueled decisions. If you have ever had a conversation with one, read a book or seen an interview you’ve probably heard them say this.

Many asset managers do not agree on what are the best investments. Depending on how they are compensated, with commissions or fee-only, they might push different investment vehicles. Different mixes of stocks and bonds. Different criteria for choosing a mutual fund. Even though asset managers might disagree on how to invest your money, it’s pretty safe to say that they will likely agree on too things—diversify and stay the course.

So, why are these two things so important? If there is such a wide range of preference and opinion, how are these two points agreed upon? And why are they mentioned together so often?

Diversify

To start with, you have to understand what diversity is, when talking about investments. Diversity means to be diverse, and being diverse means to have different kinds, forms, characters, etc.; unlike. Applied to investments, it means simply: to have different kinds of investments.

If you own stock in Pepsi or Coke, Exxon or Chevron, Disney or Comcast are you diversified? Only if you consider a diet made entirely of bread diverse. Sure you have white, wheat, rye, pumpernickel, and sesame seed bagels, but it’s still all bread. It’s hardly a balanced diet, and it’s not good for your health—just like a portfolio of all the same thing isn’t good for your future financial stability.

If your portfolio is properly diversified, some of its components will be soaring while others aren’t. Then, without warning they’ll do a role reversal. This is a good thing. It means you’re truly well-diversified.

A diversified portfolio may never make you a fortune, but you won’t lose one either.

Stay the Course

Once you’ve built that diversified portfolio, or your asset manager has, LEAVE IT ALONE. Stay the course.

Think of your investments like a tree. You went to the garden center and picked out a beautiful sapling, and planted it in the earth. It takes root and grows. The air, water, and nutrients around it help it flourish and grow from a tiny sapling to a towering shade tree. It takes what it needs and uses it. It needs very little care from you. You rake up the fallen leaves in the autumn, trim its branches as needed, but a tree is a pretty low maintenance plant. It doesn’t need constant attention from you. You plant it and leave it alone.

What you don’t do is dig it up every ninety days to check its progress. You don’t dig it up in the winter and move it to the garage to protect it from bad weather. Though its leaves fall and it stops growing for a season, the tree itself does not die. It comes back every spring, bigger and stronger.

Give the tree enough room, light, and time — and pretty much leave it alone. It will give you back air, shade, and beauty as it grows. And will go on doing so for your children even after you’re gone.

That’s what investing is like, you let it be. You build your diverse portfolio, hire your asset manager, and let your nest egg grow. When the market corrects itself, and experiences a temporary downturn, it’s just that — temporary. It’s the winter. Spring will come and your portfolio will grow again, coming back bigger and stronger than ever. But only if you don’t give in to the normal, human impulse to panic.

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