Diversified portfolio remains good idea

By Thomas Oliver

The Atlanta Journal-Constitution

It’s been a year.

Remember when we were watching the impossible take place?

Our 401(k)s were getting mauled as the Panic of 2008 set in. We were already hurting by then, as we had been watching our investments decline since the previous autumn. We were in the 11th month of a bear market.

But what happened then is one for the ages: the bear jumped off the cliff.

By the time the panic subsided, most 401(k)s were down 40 percent or more.

Using the Dow Jones average and simple math, we can see how far we fell and how far we are from full restitution despite the recent run.

From a high of 14,164 on Oct. 9, 2007, to its low of 6,547 on March 9 of this year, the Dow lost 54 percent.

Even though it has risen 48 percent since then, it’s still 46 percent off the high. (Don’t you hate the way math works?)

So, now what?

I interviewed three investment advisers to the wealthy to see what advice I could glean for the rest of us.

All three disputed the current fad that says the old rules were swept away by last year.

The idea that diversification, for example, didn’t withstand the test.

“It’s not really true that everything got tarred and feathered last year,” says Phil Larkins, senior portfolio manager at Northern Trust, Atlanta.

If you’d had half your portfolio in Treasury bonds, which on average were up 10 percent, your overall loss would have been 20 percent instead of 40 percent, according to Larkins.

“Diversification doesn’t mean you will always be up,” he says. “But it can mitigate the bad periods.”

Adrian Cronje, senior VP and chief investment strategist at Wilmington Trust, says it is symptomatic of classic investing mistakes to write off things that have worked in the past and chase after some new fad.

Diversification “works its magic over the long term,” Cronje says.

An old rule of thumb says subtract your age from 100, and that’s the percentage of stocks your portfolio should contain.

Rules of thumb are good, says Dorsey Farr of French Wolf & Farr. But Farr advises paying attention to valuations. “If you buy bonds when interest rates are low, then your return will be low,” he says.

And to Larkin’s’ way of thinking, the split is too conservative and worked best for a generation who didn’t expect to live to 85.

He’d add 5 to 10 percentage points to those calculations, so that a 35-year-old would have 75 percent in stocks, while a 75-year-old might want 30 percent in stocks.

All three sense a pullback is coming.

Farr says the fundamentals look like they did in late 2007, when the last bull died and the bear that ran off the cliff emerged.

Cronje says we have gone from irrational fear to irrational optimism.

“We are a little worried the markets are getting ahead of themselves,” Cronje said.

Which is one way of saying duck if you aren’t diversified.

Thomas Oliver writes a business column. He can be reached at toliver.writeright@gmail.com.