It is a known fact that a significant loss necessitates a substantial gain to recoup it. However, large profits are not easy to come by and cannot be taken for granted.

Moreover, the unpredictability of the market makes it uncertain whether the stock that caused a substantial loss will yield substantial gains again.

Charting the returns of companies recommended in the newsletter provides valuable insights:

Among the 500+ recommended companies, there were only 24 with returns exceeding 100%, while the majority of returns fell within the range of 0% to 40%.

Additionally, the implementation of stringent stop-loss measures has effectively limited losses, evident from the decreased frequency of returns below 0% on the chart.

Summing up and drawing conclusions

Considering the aforementioned data, what does this mean for our portfolio?

Consistent and modest returns from a well-diversified portfolio prove to be more effective than erratic profits over time, providing a sense of security and tranquility.

Hence, the newsletter advocates maintaining individual positions at not more than 2% globally, offering the most simplistic and optimal approach to diversifying your portfolio.

Similarly, it is paramount to refrain from being envious of friends boasting about their staggering profits from individual stocks or high-risk crypto investments. In all likelihood, their overall long-term returns pale in comparison to those achieved from a prudently diversified portfolio. In essence, you have been able to sleep peacefully every night while steadily growing your wealth.

Isn't that something to be content about?

Recommended Reading

International Diversification: Still a Solid Strategy

Michael Kitces' insightful guest post, Why International Diversification Is Still The Prudent Strategy by Larry Swedroe, sheds light on the significance of global diversification in the face of recency bias. This approach remains a prudent strategy, emphasizing the importance of maintaining the right perspective on short- and long-term results.

Summary:

Investors often argue against global diversification, citing instances where all countries tend to perform poorly during systemic financial crises. While this observation holds true for the short term, it is imperative to acknowledge the natural disparities in market recovery rates among different countries over the long term. By diversifying globally, investors are better positioned to benefit from the natural cycle of global markets, balancing slightly lower returns with the potential for superior yields in the aggregate over time.

2023: A Tale for Bulls and Bears

Discipline Funds presented an intriguing perspective in their article “2023 – The Year That Gives Everyone a Narrative,” suggesting that the current market presents a unique “story” that appeals to various investor sentiments.

Bears' Narrative:

• Industrial production has stagnated at 0%.
• PMI has been contracting consistently throughout the year.
• Retail sales have experienced a mere 0.5% growth.
• Housing starts and mortgage applications have plummeted by 40-50%.
• Commercial real estate, adjusted for inflation, has declined by 20%.
• Residential real estate, adjusted for inflation, has seen a 5% decrease.
• The stock market has been in the red for two years and remains -14% adjusted for inflation.
• Both the equal weight S&P 500 and the Dow have shown a modest 8% growth in 2023, barely surpassing T-Bill performance.
• REITs and broad real estate indices are down by -25% from 2022 highs.
• The regional bank index is still down -16% year to date and -29% from its peak.
• Core PCE inflation remains at 4%+, double the Fed's target.

Bulls' Narrative:

• Real GDP has maintained an average of 4% over two years.
• Monthly payroll growth has averaged 422K over two years, with 258K in 2023.
• Nominal residential home prices have seen marginal decreases.
• Housing starts and construction hit their low point late in 2022.
• The Nasdaq has surged by over 40% this year.
• The S&P 500 has shown a 17.75% increase this year.
• Homebuilders have seen a 40% gain this year.
• Regional banks have climbed by 35% since the banking panic in May.
• Headline inflation has dropped from 9% to 3%.

…

It's crucial to note that environments characterized by low unemployment, soaring valuations, and tight credit are associated with subpar risk-adjusted returns in the stock market.

The recent 7 months' performance doesn't alter this fact.

What's more, all of this forges a landscape conducive to highly charged emotions, fear, greed, and uncertainty. The positive aspect is that you don't need to take on substantial long-term risk to achieve certainty when T-Bills yield 5.5%. Formulating a well-structured financial plan can assist in partitioning your assets in a manner that helps you steer clear of the kind of binary thinking that frequently leads to calamitous investment blunders.

1 – A compelling illustration is a 10-year AAA rated bond yielding 4%. While you can trade this security over the course of a decade, its average annual yield cannot exceed 4%. There may be traders who earn more or less than 4% as they attempt to time price shifts, but on average, traders of this instrument will secure a 4% yield before taxes and fees, and no more. This general principle similarly applies to the stock market over extended periods.

2 – Contrary to expectations, the most substantial stock market downturns typically occur in environments marked by low unemployment, constrained credit, and elevated valuations. This trifecta sets the stage for erratic stock returns, as evidenced in the past 24 months.

Not yet subscribed? Click here to gain insights from the most effective strategies we have trialed RIGHT NOW!