No one wants to walk around every day and wonder what can go wrong to ruin something. It can consume 100 percent of your time as you begin to ponder the possibilities. You quickly realize that you couldn’t possibly think of all the possibilities, so you build mechanisms - insurance, savings, legal documents and ownership structures to accommodate the unexpected in such a way as may be appropriate when it needs to be called upon. The problem is what may seem appropriate today could be very different in the future. If you lived your entire life around what you expect to happen and don’t pay attention to what has really happened, you are likely to be missing opportunity to both protect yourself or even benefit from seeing the other side.
On an estate plan, for example, it is quite the relief when a family finally executes a set of documents where they feel that their estate is in good shape. Then a few months or year later, you forget what the documents say and then three or four years later when someone like me gets their eyes on it, it goes through a complete overhaul with issues and provisions that you hadn’t considered before.
Investment portfolios also benefit from expecting the unexpected.
For example, if you abruptly and significantly altered your portfolio to prepare for rising rates the first day that you felt rates were headed up, you may have been wrong for a long time. Will rates head up? Eventually, that is very likely. When? For the investor who may have taken a contrary position with their portfolio, they may have benefited from locking in higher yields on longer term or higher risk interest bearing investments.
The same would be said about market behavior in general.
At any point, there is always an opinion to be had about the directions of markets and what world or domestic event will cause the next tumble. Some like the political environment and feel it will be great for investors; others are scared to death. Both are probably right about market direction regardless of which way the political sentiment is swinging at any given moment.
Markets go up and markets go down. Not much of that volatility is in your control, but how much of it you allow into your portfolio is completely within in your control. Diversification in general is a vote in favor of expecting that owning different types of investment asset classes over long periods of time allows you to benefit from market leadership rotation.
Some years it will be commodities, real estate or other inflation driven assets. In others it will be fear driven assets like government debt instruments and money markets. Other years it will be optimism in capitalism and the capital markets that lead the appreciation charge. Your job is to orchestrate the moving parts and be sure that each is current or hire someone to do that for you.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. No strategy assures success or protects against loss.