With the markets hitting all-time highs almost every day, it brings me back to other time periods of my career when people could argue that the stock market might be getting overvalued. When I think to 2000 and 2008, I remember friends and family coming to me afterward and asking for me to help them. Obviously, there is nothing you can do after the fact; it’s like asking to buy insurance after the accident. But you can learn from your mistakes, and there was one common mistake I saw in most of the retail investor’s portfolio I looked at, and that was the lack of diversification.
What amazed me was when you spoke to them or their financial advisor, they would all show me that they had a little of growth, value, small cap, international mutual funds and some index and ETF’s, etc. But when you took a closer look you would see that each one of those mutual funds, ETF’s, Index funds, owned the same stocks. I looked at three different mutual funds in my mother in laws account at the end of 2009, and I was shocked to see how they all owned apple, Lehman brothers, Microsoft and two owned Bear Sterns. I could go on, but I think you get the point. Her portfolio looked great from the outside and performed extremely well when the market went up every day, but when the market turned, she got walloped because she was never truly diversified. Even her financial advisor had no clue what stocks were in the mutual funds he was putting her in, all he cared about was how well they performed in the past and the fee’s he was getting.
When your portfolio is making money every day and when the NASDAQ 100 is up 31% for the year and has not had a down year in 6 years, and the SP 500 is up 16% and has not had a down year in 6 years, light bulbs should be going off in your head that this is not normal. When you hear that FANG stocks (Facebook, Amazon, Netflix, and Google + Apple and Microsoft) have made up over a third of the performance of the SP500. It is imperative to delve into each one of your mutual funds, index funds, ETFs and see if you are truly diversified. You should arm yourself with questions for your financial advisor or whoever is managing your money and ask them immediately. Am I diversified, how do I protect my profits? Where am I overexposed?, Where is portfolio overlapping, What will happen to my portfolio if the SP 500 drops 10%, 20%, 30%, How will those drops affect my lifestyle? No question is a dumb question when it comes to your money. By being proactive and taking the necessary steps to make sure your portfolio has true diversification you will be ahead of the next market correction.