Markets

An Investor's Best Friend? Financial Advisors' Daily Digest

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By SA Gil Weinreich :

So you're finally in reach of your $1 million retirement portfolio. You've worked, saved and invested hard for an early and comfortable retirement. While your salary was above-average, you were not in the category of investor normally expected to reach $1 million, so you took advantage of your higher-than-average risk tolerance, and invested 100% in equities. You've got just a few thousand dollars to go before you hit the seven-figure column, an amount you've seen your portfolio climb on a reasonably good day.

As you contemplate how to best manage that million dollars - by keeping the gas firmly on the pedal or by withdrawing a portion into safe assets - the unthinkable occurs. The "big one," oft discussed but infrequently seen, comes from out of nowhere and the market starts tanking. The trigger was the first large-scale terrorist attack on U.S. soil since 9/11. Intelligence agencies express certainty that the terrorists had the help of a rogue nation - Iran or North Korea. You know, one of those nations whose menacing actions and threatening capabilities have been observed but ignored by politicians of both political parties, to the extent that people ceased to take the threats seriously.

Bypassing the symbolic power of the Twin Towers chosen in 2000, the terrorists this time targeted Silicon Valley. Apple ( AAPL ) became a penny stock before authorities could shut down trading. Alphabet ( GOOG ) ( GOOGL ) was also wiped out. Your overall portfolio held up better in the first few days, losing only 45%, but each day it continues to bleed. The President vows to make the enemy pay and promises a quick rebuilding. His political opponents blame him for letting America's guard down and launch an immediate investigation into his administration's role in the intelligence lapse that allowed this devastation to occur.

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Okay, first my apologies for writing something so unpleasant. May we never know such sorrows. Nevertheless, I wanted to address the issue of risk that emerged as a central debating point in Friday's article on surviving a protracted decline , and I thought it best to illustrate with today's biggest risks: U.S. economic vulnerability, festering geopolitical risks and a toxic level of political and public acrimony. In that light, let's examine a question raised by one commenter as to the relative efficacy of "time diversification" - essentially, the idea that time diversifies away risk - and portfolio diversification, via ownership of different kinds of assets.

In defense of the former view, one commenter remarked that "time is an investor's best friend." In questioning the latter view, another commenter wondered about a perceived growing tendency toward asset correlation, implying that when the chips are down, everything goes down together. Let's take them in reverse order.

The media hype, which tends to center on one theme du jour , will certainly give the impression that everything's going down together. But after the shock wears off, markets will sort things out. A negative event impacting Silicon Valley may in time have a positive effect on other assets - perhaps (in the above illustration) on real estate in Malibu in safe Southern California or in the stocks of large-scale industrial builders. The reason is simple common sense. Rainstorms may dampen business for restaurants, but they're great for umbrella salesmen.

Time, on the other hand - by reputation an investor's best friend - is a rather fickle friend, seemingly loyal until the days of evil come and the pain of desertion is evermore felt. Our aggressive investor, above, may never recover his paper losses no matter how "tough" his attitude for the simple reason that his losses may remain losses. If he really was as undiversified as the rather extreme example I presented, then all that toughness would likely melt like a stick of butter on a hot July day. Human nature to a large extent governs our feelings and behavior, and when people see no way out, they often simply give up (e.g., sell at depressed prices). An investor who is well diversified at least has options, and can focus on what's holding up, giving underperforming assets time to recover.

And that is why, in answer to the question posted in Friday's comments , portfolio diversification (and asset allocation) is an investor's true friend. Fickle-friend time is concerned with its prestige and offers the false assurance that everything will be okay in the long run. A true friend is always willing to tell you the truth , i.e., admit his ignorance by saying " I don't know :" i.e., "I don't know what will be better in the future. I can't see into the future. Better to limit our returns and spread our bets."

Indeed, risk increases with time, as the academics say, and that has a related implication. If people truly understood the risk that accompanies time, they would invest their time differently - that is, make every moment count. Because we really don't know what lies ahead.

Please share your thoughts in our comments section. And here are today's financial advisor-related links:

  • Jeff Miller weighs the week ahead , and is acknowledged as a Top 100 advisor by Investopedia.
  • BlackRock survey: Investors worried about retirement , but stuck in cash.
  • Franklin-Templeton Investors: Short-term fears affect millennials in particular.
  • Elazar Advisors, LLC presents a short video for traders on stocks, bonds, gold and the dollar.

For more content geared to FAs, visit the Financial Advisor Center .

See also Is Golub Capital BDC Finally A Buy? on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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