I know that there were a lot of negative things that happened in 2020. It’s a year that many people would just as soon forget and for good reason. But some good did come from those 365 days. One simple benefit I realized was the loss of a nearly two hour a day commute. Another positive from 2020 was the weather. It may seem trivial to a lot of people but I think we may have set a record in Western PA for the number of days with sunshine. More sunny days than I can ever remember in my entire life. A statistical outlier for sure. So, with a little extra time, a lot of sunshine and nowhere to go I joined the family in some weekly berry picking. Not something I’ve done much of in the last 40 years. But since we recently had some logging done on the property we had more space for a bumper crop of raspberries. More berries that we pick and definitely more than we could possibly eat. And after weeks of picking raspberries we started picking blackberries which were equally abundant. We ended up freezing much of what was harvested.
The summer of 2021 has been just a bit different. Anyone in in Western Pennsylvania will be happy to tell you that we have had our share of rain and storms this year. But when July came around all I was thinking about was the berry bounty that I was surely about to experience. And I had more serious plans for those berries this year. The plan was to make (a lot) raspberry jam. On a weekend that I just knew would be right, because it was last year, I headed out to all the best spots. I was there when I needed to be, but the berries weren’t. Why? It only took a moment for me to realize it was the weather. You need the right temps and a healthy dose of sun to produce good fruit. Ask any grape grower. These were good stocks (stems) and there were plenty of them but the fruit simply wasn’t. It’s still a great spot and certainly will be again another year. But this year the climate/environment in which this particular fruit needed to flourish had changed. We managed a small harvest but it fell well short of what I had anticipated and planned for. The weather does have identifiable patterns but within each of our four season you can experience FAR from average climatic events.
Now its not like I was planning on selling the berries or the jam. But if I was, if that berry crop was my income for the year, I would probably have a tough time making ends meet. My crop or assets weren’t diversified and I would have been negatively impacted by an event I couldn’t control. The apples on the property are doing very well yet they experienced the same weather? Diversification is simply a way to hedge your bets. You know, “Don’t put all your eggs in one basket.” A well-diversified investment strategy is one that gives the investor a chance to have a “bumper crop” when times are good but also opportunities for some growth or protection when things aren’t going well. When the “economic climate” is not so favorable and we have to weather some storms. You see, just because you have an investment (crop) that has done well in the past doesn’t mean it will in the future. There are economic “elements” and world events that we simply can’t control and more often than not can’t foresee.
Unfortunately, over the last several decades the benefits of traditional or basic diversification have slowly diminished. Asset classes like stocks and bond that were once thought to move in near opposite directions have seen their correlation increase in recent times of market pressure. Meaning that when one went down so did the other, giving investors little place to hide. There is still plenty of value to be realized in a well-diversified portfolio. But today’s investor and certainly advisors should be intentionally taking diversification to another level. More favorable risk adjusted returns can be realized by diversifying not only WHAT investments are managed but HOW those investments are managed. In other words, style or implementation can make a difference. Then you can and probably should study your account registration diversification. A fancy way of saying maybe you shouldn’t have all or your money in an IRA. A place where you don’t get to control how much of that account you get to keep. (You can control nor predict the tax code) Diversification in a portfolio is called Asset Allocation. Diversification of financial instruments inside your comprehensive plan is call Product Allocation. Something that can be particularly important as one nears or enters a life transition when they may need to start taking income from their savings and investments. Remember, BUILD your life’s vision, create a PLAN to support the vision, GROW your assets to fuel the PLAN.
*Asset allocation, which is driven by complex mathematical models, should not be confused with the much simpler concept of diversification.