The Timeless Power of Diversification: A Lesson from the Past for Today’s Investors
Brad Smith, CIM, Senior Investment Advisor, Advice First Wealth, February 11, 2025
In the days of long sea voyages and treacherous trade routes, merchants faced the ever-present risk of losing their entire shipment if disaster struck. Whether due to storms, pirate attacks, or shipwrecks, the dangers of the open sea were always looming. To mitigate this risk, savvy merchants adopted a strategy of dividing their cargo among multiple ships—typically seven or eight—rather than placing all their goods on a single vessel. This approach allowed them to safeguard their investments. If one ship was lost, the merchant would still have the majority of their goods intact on the other ships. By spreading the risk across different vessels, they maximized the chances that at least some portion of their cargo would reach its destination.
This concept of diversification, though centuries old, remains a cornerstone of modern finance and business. Just as merchants in the past mitigated risk by dispersing their goods, today’s investors spread their assets across different stocks, bonds, and alternative investments to protect against potential losses. Whether on the high seas or in the financial markets, diversification is still a time-tested strategy for managing risk and ensuring long-term resilience.
A question I am often asked is, "Are we in a bubble?" While I can’t predict the future, my 25+ years of experience as an investment advisor provide some valuable insights. The S&P 500 has had a strong run in recent years—2023 saw a +26% return and 2024 a +25% return. Can it continue? Many investors still remember 2022, when neither stocks nor bonds provided protection during a turbulent market. That is not diversification.
It’s important to note that many investors mistakenly believe their portfolios are diversified when, in reality, they are not. If your portfolio is heavily weighted toward 60% equities, 38% bonds, and 2% cash, it’s not truly diversified. When stocks and bonds have a correlation of 1 (meaning they rise or fall together), the benefits of diversification evaporate. This often happens during periods of market volatility, such as financial crises or times of economic uncertainty, when even seemingly unrelated assets can move in unison, either up or down.
Prudent investors, including pension plans and large institutions, understand the power of true diversification by utilizing at least six or more asset classes. Historically, these types of investments—such as Private Credit, Private Real Estate, and Private Equity—were available only to large institutional investors. However, they are now accessible to retail investors as well. Adding these private investments to your portfolio can provide the diversification needed during times of heightened market uncertainty.
Sometimes, comfort comes at a cost. Investors often resist change, believing that sticking to familiar strategies feels safer—even when it may not be in their best interest. But failing to adapt can be costly. Holding onto outdated portfolios can harm returns, delaying adjustments can lead to missed opportunities, and clinging to old strategies can increase risk or prevent growth.
Don’t let the status quo hold you back. Embrace change for better investment outcomes. Take advice from King Solomon, whose wisdom has stood the test of time: "Divide your portions to seven, even to eight, for you do not know what misfortune may occur on the earth." — Ecclesiastes 11:2.
Don’t leave your financial future to chance. Schedule a consultation with me today, and let’s ensure your portfolio is truly diversified and set for long-term success.
