Quarterly Investment Foundations Fourth Quarter 2023

Mastering The Subject

Diversifying Your Stockpile

The fall season is upon us, and I find myself noticing the squirrels more often this time of year. With winter just around the corner, the squirrels in my neighborhood are busy collecting nuts and storing them throughout the yard. Whether they realize it or not, the squirrels are putting an important investment technique into practice. By collecting multiple types of nuts – acorns, walnuts, and other seeds – and storing them in multiple places, the chances that they will have food during the worst snowstorms increase. Spreading out risk when applied to investing is called diversification, and diversification can increase your chances of preserving your wealth during economic “snowstorms!”

There are five main public asset classes that can be invested in to increase the diversification of your investment portfolio:

1. Stocks - ownership of individual companies

2. Bonds - lending to governments or companies

3. Real Estate - ownership of physical buildings with rental income

4. Commodities - ownership of natural resources

5. Cash - deposits in your savings account

Each of these asset classes have different levels of risk and return. Importantly, these asset classes also have low correlation to one other – in other words when one goes down, others may go up. The goal of diversification is to build a portfolio that weathers different economic conditions and decreases the risk of substantial loss. Collecting the right mix of asset classes can smooth out the returns from your portfolio and ensure that the wealth you have saved is there when you need it. Using a mix of stocks, bonds, and real estate provides the right balance of risk and return for most investors.

Diversification is also important within each asset class. You may be familiar with geographic diversification – owning stocks and bonds from around the world. In fact, 40% of the value of global publicly traded stocks is located outside of the United States. For bonds, 60% of the value of globally traded bonds are located outside of the United States. Not all economies are growing or slowing at the same time, and this makes it important to diversify your portfolio globally. Additionally, many of the largest companies that you are familiar with are global companies. Did you know that Jeep, Dodge, and Chrysler brands are owned by Stellantis, an Italian company? Toyota recently had three of the top ten selling cars in the United States. Ignoring companies based outside of the United States misses opportunities to earn a return from the growth of our own economy too.

So how has diversification worked out for investors? You may be thinking that the United States stock market has done better than any other asset class over the past several years – why invest elsewhere? An investor who diversifies their portfolio must remind themselves of the fallacy of recency bias – the belief that what has happened recently will continue. Let’s look at a portfolio invested in only the S&P 500 index (a measure of the 500 largest stocks in the US) versus a globally diversified portfolio of 60% stocks and 40% bonds. If you had started investing during the heights of the Dot Com Bubble, a diversified portfolio would have had better returns than a S&P 500 portfolio from 2000 until the end of 2018.

_{The S&P 500 index was used to represent “US Stocks” and a combination of 60% of the MSCI ACWI All-World index and 40% of the US Aggregate Bond index were used for the “Diversified 60/40 Portfolio.” The time period for the data was from 1/1/2000 to 8/31/2023. Source: Dimensional Fund Advisors. Investing involves risk and past returns are not a guarantee of future performance.}

If you can tolerate the potential for large downturns of a 100% stock portfolio, it will provide more return over the long run. Yet, during the economic storms of the Dot Com Bubble and the Great Recession, a diversified portfolio maintained its value better than an investment in only stocks.

Squirrels know the value of storing up multiple stockpiles of food. Get ready now for the next economic snowstorm! With a diversified portfolio and discipline to stick to your plan, you can preserve your wealth for when you need it most.

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Market Check-In:

- Walking the Tightrope: Central banks around the world are still walking the fine line of decreasing inflation and not stifling economic growth too much. At the end of September, the Federal Reserve reiterated its commitment to decrease inflation by keeping interest rates higher for longer and signaling the possibility of increasing rates again before the end of the year. Manufacturing in the US has been slowing down since November of 2022, yet the service industry remains strong while consumers spend their excess savings on travel and experiences. China has begun to see some benefits of policies implemented to stimulate economic growth with increasing manufacturing activity, however the consumer sentiment in China is back to levels during the zero-covid lockdowns. Economies around the world remain sensitive to disturbances and policy makers must be careful about each move they make.

- Stocks Pull Back: In the third quarter, stocks around the world gave up gains for the quarter yet remain positive for the year. As interest rates stay higher for longer, investors expect corporate profits to remain smaller. US stocks lost 3.25% and non-US stocks lost 4.02%. In both the US and globally, value and small company stocks outperformed growth and large company stocks.

- Bond Yields Increased, Prices Decreased: The yields on bonds rose for the quarter with the 10-year US treasury note reaching 4.5%. Increasing yields on bonds means that the value of bonds goes down and this is consistent with losses in US bonds of 3.23%. Globally, bonds prices also went down and lost 3.59% for the quarter. For the year, bonds in the US and outside of the US have lost value.

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_{Sources:
“Tesla breaks into America’s bestselling cars list for 2022, but trucks still dominate,” https://www.cnbc.com/2023/01/07/americas-top-10-bestselling-cars-of-2022-tesla-makes-the-cut.html, January 7, 2023.
“Market Perspectives: Tension,” Charles Schwab, September 15, 2023.
“Monthly ETF Field Guide,” Avantis Investors, September 30, 2023.
“3rd Quarter Economic and Market Outlook: Understanding Risks and Opportunities in the Web of Inflation, Interest Rates, Valuations, and More,” Kitces.com, October 4, 2023}

_{Disclosure:
The opinions expressed herein are those of Grand Wealth Management and are subject to change without notice. This material is not financial advice or an offer to sell any product. This does not constitute as investment, legal, or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor. Grand Wealth Management is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Grand Wealth Management's investment advisory services can be found in its Form ADV Part 2, which is located below.}