Diversification is one of the
most reliable rules of
successful investing. Even
for those with high-risk, high-returns
temperaments, diversification is
invaluable, especially when the
market turns ornery.
In the bull market of the 1980s
and 1990s, a buy-the-market
strategy served many investors well
in the stock market, as very few
investment styles faltered—the
rising tide lifted all boats. Today’s
market, however, displays more
volatility among different types of
investments, so it pays for investors
to pay closer attention to how they
diversify their assets.
Over the last several years
the market has been roiled by
a technology-led correction, a
recession in the first three quarters of
2001, terrorist attacks, a recovery
that took two years to start adding
jobs and, recently, interest-rate hikes.
Amid these circumstances, certain
investment styles have outperformed
others by large margins, only to later
have those roles reversed.
For example, in the first half of
2004, mid-cap blend (a mix of both
growth and value stocks) was the top
performer among investment styles,
according to Morningstar, growing at
a 7.19 percent rate. Medium-growth
stocks, meanwhile, grew at a slightly
more modest 5.59 percent rate.
However, over a longer three-year
time frame, June 29, 2001, to June
29, 2004, medium-growth stocks
outperformed medium-blend stocks
by two percentage points.
In this environment, it may prove
profitable to position one’s portfolio
to take advantage of different
investment styles coming into, and
falling out of, favor at different
times. This is especially true for
investors in their 20s, 30s and 40s,
who probably should have a much
larger portion of their portfolios in
equities than older investors. With a
portfolio diversified among various
investment styles, new money can
be invested in the styles that the
market has undervalued. Then the
investor will have a larger stake in
those styles when the market makes
its upside correction.
Admittedly, knowing which styles
present the greatest promise is
easier said than done, especially if
investors are on their own. This is
where your Thrivent Financial
representative can be of service,
helping you decide which style of
investing is right for you.
While diversification can help reduce
market risk, it does not eliminate it.
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