Diversity and Balance in a Portfolio

You may notice that I did not address bonds and their performance if we have higher than expected inflation.  While I do not think bonds will fare well in such an environment, there are two reasons I think it is important to continue to own them.  First, as noted above, the market does not anticipate high inflation and we should not base a plan on something with a low probability.  Second, it is not bond’s job to outpace high inflation times.  This is what stocks are for!  The definition of a diversified portfolio is to follow the adage “Don’t put all your eggs in one basket!” – which means owning different types of asset classes that behave differently.  During an unexpected event like high inflation, we cannot expect everything we own to perform well.  What we do want is some things which do very well to offset the things that do not do as well.  This is the classic example of a balanced portfolio.

Think about your portfolio like a teeter totter on a playground. Bonds are on one end, and stocks on the other.   If the amounts on each end are relatively similar, all is good.  But if there is only weight on one end, it does not work.  A very bond-heavy portfolio is not well equipped to handle a high inflation environment.  Normally when people are invested in that manner it is because they are very conservative and risk averse.  However, and unfortunately, a bigger risk may have been unintentionally added which is your assets not outpacing inflation to maintain your standard of living.  On the other extreme, an all-stock portfolio is much more sensitive to market volatility.  For someone young saving for retirement who has not accumulated large sums this is perfectly fine.  For someone two years from retirement who has accumulated enough to accomplish all their financial goals, it is not.  Everyone’s balance is different depending on their needs, and if you would like to meet and review your investment plan and make sure it is still appropriate, we are always happy, willing, and able to do so.