Needle.....Haystack; What's more important?

I promised a story about “true diversification” and this led me to consider an “age-old” parable of looking for a needle in a haystack. You know this parable don’t you? The emphasis leans more toward the needle and not the haystack. Think about it. Finding the needle in the haystack is a good thing---perhaps like finding the goose that lays golden eggs!

Or is it a good thing in the context of wealth creation and investing? Is finding the needle in the haystack more important than the haystack? I think not! Successful investing requires a shift in what you think about; a shift in the questions you seek answers to. Change your perspective by embracing the haystack. Wasting your most valuable asset, time, while looking for the needle is a loser’s game.

The key to long term investment performance is minimizing losses. The hay stack is analogous to all the asset classes-or the entire market. This is infinitely more important than the needle; a single company stock or class. Owning a portfolio with a large % of value associated with one asset class can lead to massive increases or losses. This is volatility and something that can destroy your peace of mind and account value. (Volatility is scientifically measurable.)

Over the years, I’ve analyzed numerous client portfolios. While working with one client to purchase a new home, she asked me her employer sponsored 401k plan was so volatile? The answer was clear after I analyzed it. On the surface, the 15 individual mutual funds and company stock she owned gave the impression of a diversified retirement plan. Additionally, she had a total of about 3,750 unique holdings inside the mutual funds. However, 56% of the value of her 401k was tied to the performance of only 51 individual US Large Cap stocks inside the mutual funds!! She had no idea her portfolio was so overly weighted to one class with so few holdings.

It’s easy as an Investor Coach to see how negative investor behavior is influenced by what a person believes to be true. What’s heard from co-workers around the water cooler or a family member at the holiday get together influences individuals to focus on searching for these proverbial needles instead of embracing the haystack!

Picking stocks with high rates of return, predicting the next market move in a way that makes “buying high and selling low”, unknowingly having a mix of investments overly weighted to one asset class fall into this category of negative behaviors.

Life would be much easier if we could predict the future. However, when it comes to investing, not even mutual fund managers, with their countless research resources can predict the future. Change your focus by getting answers to the right questions. Work with an Investor Coach to show you the way. You won’t waste time, know what’s in the haystack and not have to worry about looking for the needle!