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Neighbors of North Aurora

A case for diversification

05/21/2015 01:07PM ● By Katelyn Nelson

With the S&P 500 index reaching historic highs and outperforming some of the other major indexes during 2014, several of my financial planning clients have asked if they should become less diversified and invest all of their liquid assets in companies that make up the S&P 500 index. By including other asset classes that underperformed the S&P 500 during 2014, it is logical that the portfolio would not have performed as well as the S&P 500 during the same time period. While that is true, my response to my clients is that diversification is as important today as it has always been.

Diversification continues to be a means to potentially reduce risk in your portfolio. Burt White, Chief Investment Officer of LPL Financial, recently pointed out that “Over the past 20 years, the S&P 500 has only outperformed all other major asset classes (including small, mid, foreign developed, and emerging markets) 30% of the time, and it was the worst performing asset class 25% of the time. It is important to stick with your investment plan and be invested in at least several different types of investments. Diversification has historically worked, and as we look at 2015 so far, it may be starting to work again.” 

Some of the asset classes to consider adding to or keeping in your portfolio would be large companies, such as S&P 500 companies as well as mid-size and smaller companies as well. I would also consider companies (large, medium, and small) that have a history of, and outlook for, consistently growing dividends. Foreign investments can add diversification well. Also, Interest bearing investments such as bonds can add a measure of stability to your portfolio when stock values decline. There are many other asset classes that should be considered when building and maintaining a diversified portfolio.

The blend of assets that is right for you will be determined by your goals, timing needs, risk tolerance, and many other factors. It is important to let those factors and your overall financial situation guide your investment decisions instead of exuberance that results from recent gains.  Please remember that diversification does not guaranty against loss. You should always consider modifying your financial plan when your circumstances change.  However, in the absence of such changes, staying on a well thought out investment plan with an appropriately diversified portfolio can sometimes be more rewarding in the long run.

All the best!

The Standard &Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guaranty of results.

Steve Ciaccio is a Wealth Advisor and founder of Ciaccio Wealth Management, located at 232 S. Batavia Ave., Batavia. He can be reached at 630-454-4599 The opinions voiced in this article are for general information only and are not intended to provide specific investment or tax advice or recommendations for any individual. Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.

©Copyright Steve Ciaccio 2015