Up until the last few weeks, some investors probably didn’t think much about diversifying. Many were content to let their investment dollars ride on the backs of the “Magnificent Seven” giant technology stocks, which seemingly could only rise in value.
But the recent stock-market stumble, spearheaded by Tesla and other tech giants, serves as a wake-up call that building a balanced investment portfolio should be taken seriously, and revisited at least once a year, if not sooner.
The market stumble, or correction, came swiftly, knocking off more than 10% of the value of the FT Wilshire 5000 Index over three weeks. This broad index tracks more than 3,000 mostly U.S. stocks. Corrections refer to drops of at least 10%, with bear markets defined as declines of 20% or greater.
Prices have bounced back a bit, though the upward momentum appears to have stalled amid rising anxiety over tariffs, lingering inflation issues, federal-workforce layoffs and other issues. Some giant tech stocks stumbled much more severely such as Tesla, which has lost roughly half its value since mid-December.
“The allure of chasing performance led some to evaluate whether diversification had lost its edge in an era dominated by a few unstoppable market leaders,” said Wilshire Associates in a recent commentary. But now, after declines focused on the big tech giants, Wilshire added that investors “who remained patient and adhered to a balanced approach are now realizing the benefits of discipline and diversification.”
Diversification is the strategy or process of spreading money among a mix or range of assets with different traits, especially risk levels. Diversifying among stocks means buying companies of different sizes and of varying industries and geographic footprints. It extends to different types of assets entirely, including bonds, real estate, gold, cash or money-market holdings.
Mutual funds and exchange-traded funds often are used, especially to fill gaps where individual stocks or bonds might not be easy to select, such as with foreign markets.
Professionals routinely follow a diversified approach, but it has been easy to ignore with giant tech stocks on such a roll until recently.
“Big tech outperformed just about everything else last year,” said Jenna Biancavilla, principal at Pearl Capital Management in Phoenix. “A lot of people who have written off international (stocks) or bonds aren’t properly diversified.”
Jeff Young, senior wealth manager at Kierland Financial Group in Scottsdale, said he always recommends diversified portfolios for long-term investors. He rebalances once a year, a process that involves subtracting a bit of money from categories that have performed especially well and reinvesting the proceeds in laggards.
