Diversification Doesn’t Eliminate the Need for Discipline, It Just Changes When It Is Needed

Posted by Ralph Sklar @ 1:00pm on August 11, 2015

It seems that everyone understands that discipline and diversification are key ingredients of successful investing, but what is not obvious is that staying diversified in the face of bull markets can take more intestinal fortitude than staying invested during bear markets.

Take 2014. If you were completely invested in the Vanguard 500 Index Fund Investor Shares (an S&P 500 index fund) you would have earned 13.51%*. Compare that with a globally diversified portfolio of stocks which was more likely to return in the range of –3% – +7%. (See Yahoo Finance: SGENX, FDIVX funds as representative examples.) Diversification means that you will always be underperforming something in the short run, but with disciplined rebalancing it may be the ticket to outperforming in the long run. That’s something to keep in mind when your discipline needs a little reinforcement.

*All investing is subject to risk. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future returns. You cannot invest directly in an index such as the S&P 500 index, but an index fund is generally designed to track the performance of the underlying index as closely as possible.