Finance 7. Diversification helps (but it’s not a silver bullet) One of the central tenets of personal finance is diversification: the idea of spreading one’s financial eggs among different financial assets, among different geographies, different stocks, and so on. That way, if any one of those assets experiences a bout of underperformance, the other assets in the other baskets will soften the blow. Over the course of the 11-year bull market, it had become fashionable to pooh-pooh the benefits of diversification. And, to some extent, those who did had a pretty valid point: whileU.S. companies enjoyed record-breaking gains, stocks in many other markets around the world posted unimpressive returns. While many traditional businesses offered so-so performance, the FANGs (Facebook, Amazon, Netflix, Google and similar high-tech giants) racked up incredible returns. Investors who went “all in” on the hot stocks of the day were handsomely rewarded, while investors who had listened to age-old advice to spread their eggs among different baskets had to settle for decidedly mediocre performance. The corona-crash has settled this argument − at least to some extent. Investors who held at least some of their portfolios in gold or gold stocks, for example, are likely very pleased with the performance of their holdings this year. Likewise, those who maintained a portion of their portfolio in bonds likely experienced much less of a drop than those who had gone “all in” on high-flying U.S. stocks. At the same time, diversification was not the “silver bullet” that many long-time investors expected it would be. In the recent corona-crash, there were definitely assets and stock market sectors that dropped less than others. But those looking for a “safe port in a storm” were likely frustrated by the lack of safe harbours. Simply put, everythingsuffered, at least to some extent. The takeaway: by all means diversify your portfolio. It will help soften the blow of a sharp downturn, particularly if some sectors experience the massive run-ups that we saw prior to the corona-crash (we’re looking at you, technology stocks). But don’t expect it to be a life-jacket for your portfolio. As the world economy grows increasingly integrated, when one market suffers a downturn, it’s likely that many will be affected at least to some degree. 8. Now you know why you should have a “rainy day” fund Regular readers of this column know that we’re big believers in holding at least some cash in a “rainy day” fund − a high-interest savings account, a short-term GIC, a money-market fund or something similar from which you can access cash in case the unexpected strikes. The corona-crash gave us a lesson regarding how important a “rainy day” fund can really be. Thousands of people suddenly found themselves out of work. Retirees who had to rely on their investments for income suddenly found themselves staring at deep losses in their portfolios. And many people had unexpected medical bills to pay. For those who encountered financial difficulties over the past several months, having cash in an easily-accessible account likely made life a whole lot easier, and helped provide some financial breathing room in the face of unexpected events. We’d hazard a guess that even those who never had to access their “rainy day” fund probably slept a lot better at night than those who didn’t have one. Ultimately, how much safety you need is a very personal decision. Think back and try to remember how you felt during the past few months. Would you have felt a little better − more safe, more secure, less anxious, less stressed − if you would have had, say, an extra $5,000 sitting in a rainy day bank account? What about $10,000? Or $20,000? Whatever amount you reach that makes you nod your head is a good indication of how big your emergency fund should be. CSANews | SUMMER 2020 | 31
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