Apr 01 2014
April 1, 2014

Successful Investing – Part 2

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The second key to successful investing is Diversification.  Diversification in its simplest terms is: Don’t put all your eggs in one basket.  One can diversify among asset classes as we noted before but it’s also important to diversify within asset classes.  For instance, most investment strategies include stocks of  United States large capitalization companies as one of the asset classes.  Let’s say one strategy picks only one stock to occupy this asset class, i.e., Exxon Mobil (XOM).  This selection would meet the criteria for domestic large capitalization.  But a closer examination shows that the total return for XOM in 2013 was 19.77 %.  Not bad, but when compared with the Standard and Poor’s 500 Index, (which has XOM as one of its components) with a return in 2013 of 32.39%, XOM under-performed the overall market by almost 15 percentage points.  As of this writing, in 2014, XOM is down 6.18% while the S&P 500 is up 1.03%.  Once again a significant under-performance.  There’s nothing wrong with owning XOM.  It’s a great company.  But for the average investor, the better strategy is to own it as part of a larger diversified group so that its under-performance (which may be short term by the way) plays a smaller role and it does not get in the way of reaching one’s investment goals.  At Oak Springs Wealth Management, the asset class vehicles that we employ for our clients contain from 100 to almost 2000 individual positions.  In doing so we obtain and sometimes exceed overall market performance and minimize the impact of the difficult to avoid under-performer.

-Willis Mashburn