Monday, January 24, 2022
Technology – one of the sectors largely responsible for the significant gains experienced in 2021 – seems to be in a giving mood. A giving back mood. Despite a short week in the US markets (closed in honour of Martin Luther King Day), the tech-heavy NASDAQ is off almost 10% since the beginning of the calendar year, which caused major equity markets to decline in value during the week ending January 21, 2022.
Once again, major themes converge to cause investors anxiety. First, the forecasts to increase interest rates to combat inflation. Second, political staring contests in Europe between Russia and Ukraine (and the United States). And third, the continuing global response to COVID-19 and further economic lockdowns.
Oscar Wilde is credited with saying “To expect the unexpected shows a thoroughly modern intellect” back in the late 1800s. It seems like sage advice. For example, a year ago nobody expected the rise and fall of Peleton, or Netflix, or Crypto.
The current status quo of the markets once again reveals the importance of diversification. To borrow another phrase, it may be wise to avoid “putting all of your eggs in one basket”. If you drop the basket, you’re left with the ingredients for an omelette that very few people will want to eat.
But diversification can be at odds with that primal human emotion – greed. Diversification is about reducing overall portfolio volatility over long periods of time. Of course, if you could reliably pick the best performing stock each year, you would invest 100% of your portfolio in that single stock. They key is knowing exactly when to purchase (buy low) and when to exit (sell high). Both those values are only known in hindsight.
Take popular streaming service Netflix as an example. Netflix is one of the largest streaming services on the planet. We have a subscription – I think it’s worth it just to watch The Witcher, but I digress. Last Thursday the company released a report that highlighted (among other things) increased competition among streaming services. They were punished by the market, and shares plummeted in value. It shows how important timing is. Will Netflix stock rebound in the face of increased competition? I’m sure its shareholders would like to believe this.
Investing in diversified portfolios reduces the risk of a single stock dragging performance down. It also reduces the opportunity of a single high-flying stock to make performance soar. Any investor owning an ETF or index fund of the US NASDAQ index, would have exposure to Netflix and other tech companies. And while technology companies are down so far this year, diversification has avoided a deeper drop that could have been experienced by a single-stock investor.
Good investing is not just about making good decisions. It is also about not screwing up consistently. In recent years investors have experienced bull markets albeit with some blips in 2008 and 2020. No one wants to hold cash during a bull market. They want to own equities that are getting in on the action. Until there is no action.
Markets & Investing – Raymond James
Understanding Portfolio Diversification
What Financial Markets Are Telling BIden About Geopolitics
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.