Physicians have attributed poor health to diet since at least the times of Hippocrates and Galen. The authors of a comprehensive study published this month by The Lancet (a widely-respected medical journal) showed that among countries, the U.S. ranks 43rd in terms of a healthy population. Just because you’re wealthy does not mean you’re healthy. The study confirms what many believed: poor diet is responsible for more deaths than any other risk factor.
The Lancet study suggests that people need to eat a variety of nutritional sources and not overconcentrate in just one or two. It recommends eating more nuts, whole grains, and milk and decreasing the amount of sugar-sweetened foods you intake.
Doesn’t that line of thinking also sound like good advice for investors? Studies in finance have shown that a portfolio’s investment allocation and diversification directly influence wealth outcomes.
Just as a healthy diet, consisting of a good variety of foods, leads to better health, a healthy portfolio that can withstand market shocks is the result of owning a variety of investments. Just as we should not overindulge in our favorite food, our investment portfolio should not be overly concentrated in just one – or a few – securities or types of securities. A healthy investment portfolio should not be overly focused on one asset class, one stock, or one country’s securities, even the U.S. alone.
People who want a long and healthy life should gravitate toward healthy foods and limit unhealthy ones. In the same way, when building a portfolio, we should avoid gravitating towards things that give us a “sugar high.” For some, it is tech stocks; for others, it’s IPOs, or gold, or the stock of the company they work for. We need a variety of investments to maintain a healthy investment portfolio.
Just as we watch what we eat, we should look at our portfolios and see if we are gravitating toward things that may be unhealthy for us. Even long-standing winners like Apple stock may be less than ideal, as we saw in the fourth quarter of 2018. Question those things that you most desire in your portfolio. Everything in moderation.
Over the decades as an advisor, I have observed clients who focused on their company’s stock. They did very well for many years…until the company lost its focus and made some bad business decisions. In the span of a few years, these investors lost over half their wealth.
Like a healthy diet, a portfolio that’s properly balanced between various types of investments – stocks, bonds, and cash – is likely to serve investors best.
Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.