I want to conclude our video series on “Planning For Change” with some thoughts on how it applies today market and what investors can do to prepare for this inevitability.
So, The concept of change is particularly important to discuss today given the incredible run up in the S&P 500 (which are the 500 largest U.S. companies) and U.S. technology stocks. Since 2009, aside from a few brief interruptions, these areas of the market have continued to rise. It’s common for inexperienced investors, or those who began investing after 2009, to assume that these areas of the market will only go up. As we see from the examples I highlighted in previous videos, things change and can do so on a dime. While I already highlighted how the technology sector imploded and took 15 years to recover, what’s less well known is that from January 2000 through December 2009, the S&P 500 experienced no growth at all. This wasn’t the only time in history where this popular area of the market remained stagnant for a decade or longer. Experiencing no growth for a decade can change the trajectory of an investor’s financial life.
So, what can investors do to prepare for change: The best way to manage the inevitability of changing market dynamics is to plan ahead. In the context of investing, this means always embracing a philosophy of portfolio diversification. Diversification is the concept of spreading your investments into multiple areas of the market. This necessitates having exposure to both large and small U.S. stocks, domestic and international investments, stock and bonds, and so forth. (Note: Diversification does NOT mean having accounts at a dozen different institutions. This is just a mess and offers no diversification benefit at all.) Diversification allows folks to manage risk in their financial life. If one area of the market plummets, others will do well and vice versa. Unfortunately, it seems like risk management goes out the window during every Bull Market. Investors have a short memory. They only seem to remember the recent hot stock market, while conveniently forgetting the past economic downturns and stagnant markets.
It’s hard to make changes when your current investments are doing well. After all, why make modifications if everything appears to be working? The reality is that failure to take steps to minimize your investment risks today can lead to much more challenging circumstances when markets shift and your investments drop in value. Concentrating investments, instead of diversifying, may set investors back years financially. We’ve seen this story repeat itself throughout history.
Remember, the key to investing is managing risk so you can achieve your goals. It is not to gamble your financial future on one area of the market, like the NASDAQ or S&P 500.
In the area of investing, we can certainly plan ahead. No one has prophetic ability to determine what G-d’s plan is for the market. Therefore, we need to diversify our investments to minimize our risk, increase the probability of achieving our goals, and avoid potentially devastating financial consequences.
Change is inevitable. Investors should plan accordingly.