Why Investors Should Never Put All Their Eggs in One Basket

Maybe you hear rumors that the mega-rich made fortunes off just one stock, or that tech or real estate is the only sector worth your time this year. Ask yourself: Does the same team win the Super Bowl or World Series year after year? Here’s why your portfolio ought to follow multiple contenders.

I grew up in the New York area, a region with many diverse groups of people and outlets for a large array of interests – including many professional sport teams to root for.

The choices are plentiful, the possible combinations quite different. Are you a fan of the Mets or Yankees in baseball? Jets or Giants in football? Knicks or Nets in basketball? Pro hockey offers three choices: the Islanders, Rangers or Devils.

When you run into a fellow fan, you enjoy an automatic connection – you both know the same highs and lows of your specific team. Especially strong is the bond that keeps you as fans sticking together during a seriously down season (did I mention the Knicks?).

As advisors, we truly believe in the benefits of a diverse investing across different classes of assets. Your choices of companies to invest in (or root for) are as plentiful as balls and pucks flying around the Big Apple.

The difference with investing, though: For success, you need to own a portfolio that backs no favorites but a large and wide-ranging number of companies. For example, rather than cheer on one specific large company, invest in all of the large company stocks you can, aka large-capitalization investing. Owning an array of companies located in the U.S. and in international markets best helps grow your portfolio.

quail eggs

Source: iStock

In a given year, one sector of the stock market may do better than others, just like how last season the N.Y. Rangers did better in hockey than the Jets did in football or the Mets in baseball. Right now, the dividend yield (compared with how the fund did 12 months ago) in the Select Sector SPDR exchange-traded fund (XLY), representing consumer discretionary stocks in the S&P 500, is 1.34%. The yield of the similar health-care ETF (XLV) is 1.29%, the energy sector ETF (XLE) is 2.65%, the financials ETF (XLF) is 1.74%, and so on.

Last year, large U.S. companies (as the Standard & Poor’s 500 index shows) performed well: with a 11.74% return. You did even better reinvesting dividends in the S&P 500 in 2014 (for yet another year), with a 14.04% return.

In comparison, the MSCI EAFE, a stock index comprising large and midsize companies across developed countries in Europe and the Asia/Pacific region, lost 4.9% last year, in U.S. dollars. And this season? The index is handily beating U.S. counterparts.

Celebrating when any of the 11,000 companies in 44 countries (where we invest most of our clients’ portfolios) performs well takes the stress out of trying to time the hot streaks of each company or country. It’s as if you can just say you are a New York fan, huzzaing when any of the local teams win.

Investing in a complete market can give you reason to cheer when the overall global market hits home runs.

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Maureen Crimmins is the co-founder of Crimmins Wealth Management LLC in Woodcliff Lake, N.J. Her websites are www.CrimminsWM.com and www.RootsofWealth.com.

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