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By now you've likely heard the news that stocks in some unlikely companies - GameStop, AMC, Blackberry - have suddenly soared. In fact, the New York Times claims amateur investors are "Beating Wall Street at Its Own Game" with shares in GameStop skyrocketing 1,700 percent by end of day Monday, Jan. 25. In part, some of this activity appears to be tied to social media users on Reddit identifying the stocks as short sale opportunities.1 Other heavily shorted stocks, like AMC, Blackberry and Express, have been affected by this dynamic in recent days as well.
Talking with friends who got in early on the action or seeing social media shares about amateur investors doubling their money can leave anyone wondering, "Should I be reallocating my investments?" As we continue to watch this story unfold, here's a reminder about what diversification means for your portfolio.
If you're still wondering whether or not to adjust your portfolio based on these events, speak with your investment advisor first, as they can help determine what may be best for addressing your long-term financial goals.
Understanding Diversification
When it comes to diversifying your investment portfolio, it’s important to evaluate all sides of the strategy before committing to one approach over another. While investment professionals often recommend the approach for its ability to reduce risk and volatility, it could also minimize the level of returns generated. When determining the extent you should diversify your portfolio, consider your own personal investment objectives, preferred risk tolerance and strategy options. As with any important financial decision, you want to first make sure you consider both the advantages and disadvantages of each approach before making a final decision. Our view is that a security’s price is determined by the collective knowledge of the millions of buyers and sellers within the market. We view the markets as an ally, not an adversary.
At EB Wealth, we strongly believe in the principles of passive management. Evidence continues to grow that active portfolios, on average, fail to meet their benchmark. Consider asking the following questions the next time you speak to someone selling the merits of active management.
1. Can you show long term outperformance of your actively managed mandates (minimum of 10+ years)?
2. What is the investment philosophy that resulted in your outperformance, if any? Did it result from a disciplined, repeatable process, or was it simply luck?
3. What is the actual rate of return after accounting for fees (which are typically much higher for active mandates)?
Especially when preparing for your retirement, it’s important to invest your money, as well as save it. According to the Government Accountability Office (GAO), in October 2017, the median retirement savings for Americans who are between the ages of 55 and 74 translated to only $310 per month if the money were to be invested in an annuity protected by inflation.2 However, by September 2018, the Transamerica Center for Retirement Studies reported that the total household savings in retirement accounts owned by Millennials, Generation X and Baby Boomers had dramatically increased when compared to the pre-recession.2 There’s no doubt people have become more conscious of how much money they’re accumulating each month as they approach their post-employment years.
Pros of Diversifying Your Portfolio
As mentioned previously, reducing risk is one of the key reasons you might decide to diversify your portfolio. While risk can’t be eliminated entirely, diversifying your portfolio can help you manage your overall level of risk and minimize your chances of losing large sums of money over time. When you don’t diversify among your asset classes, you become even more exposed to market risk.
To go along with reducing risk, diversification also allows you to hedge your portfolio, which is an automatic benefit of refraining from putting all of your eggs in one basket. By investing in a variety of sectors, you even out your chances of getting positive and negative returns, as opposed to purely negative.
An alternative to capital appreciation, capital preservation is another benefit of diversification. Instead of focusing on your rate of return, capital preservation is all about protecting the money you already have. Because diversification involves investing in a variety of stocks, bonds and mutual funds, it may make it easier to protect the wealth you’ve already saved and accumulated.
The unusual activity we're seeing with these heavily shorted stocks like GameStop, AMC and Blackberry are created big headlines in the news, but that doesn't necessarily mean it's cause for reallocation within your own portfolio. Before making your next move, check in with your investment advisor or financial planner to determine if any action needs to be taken on your part in response to these changes.
This publication contains opinions of the writer and may not reflect opinions of Manulife Securities Investment Services Inc.. The information contained herein was obtained from sources believed to be reliable, but no representation, or warranty, express or implied, is made by the writer or Manulife Securities Investment Services Inc. or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any of the securities. The securities discussed in this publication may not be eligible for sale in some jurisdictions. If you are not a Canadian resident, this report should not have been delivered to you. This publication is not meant to provide legal or account advice. As each situation is different you should consult your own professional Advisors for advice based on your specific circumstances.
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