This article was originally published in ACM Wealth
The adage, “Don’t put all your eggs in one basket,” proves itself true in many things in life. It is especially true with stocks and bonds. One question I often get is, “Should I focus my investments on large cap stocks?” These stocks, often referred to as blue chip stocks, are associated with market-leading companies that have performed well throughout their trading history, like Nike, Coca-Cola, and Apple. My answer to that common question is a resounding, “No!” Why? Because even though they have managed to stand the test of time so far, they are not without risk. In fact, in 2008, many of these blue chip stocks declined by 38%. Ouch.
My advice is always to diversify. One proven method is to ensure you spread out your investments, so you have some in each asset class. An asset class is a group of securities that exhibits similar characteristics, behaves similarly in the marketplace, and is subject to the same laws and regulations. The three main asset classes are equities, or stocks; fixed income, or bonds; and cash equivalents. Each asset class goes up and down, with each serving a purpose within your portfolio.
Many advisors try to use a Callan Chart to help their clients understand asset classes and follow the asset classes by color. While Callan Charts indicate annual returns for different asset classes over the last 20 years and ranks them, they don’t really show a pattern, and you never know which will be up and which will be down. Instead, I prefer to discuss asset classes in terms of something everyone understands – shoes. Like asset classes, they each serve a purpose, and it is a good idea for your closet, and your portfolio, to have some of each.
