Sometimes even the experienced investor forgets how important diversification really is. Eric Nelson demonstrates what’s at stake in simple and powerful terms. Of course the situation below is theoretical: the math depends on cost, and on which securities you use to achieve your global stock mix. But, the broad-strokes points remain the same: global diversification matters. Curious about your own global diversification score? Click here to schedule a complimentary call with a qualified professional from our team.

We’ve said it before and we’ll likely say it again: Investment risks and expected rewards are related, but disciplined diversification helps us reduce the risks.

Our friends at Dimensional Fund Advisors recently released an important report supporting this point.

In their report, they took a look at four sources of expected returns found in many evidence-based investment portfolios (market, size, value, and profitability).

Using U.S. stock market data stretching back more than 50 years, they found that, about half the time, one of the four premiums delivered negative returns for any rolling ten-year period across that time frame.

That sounds risky, doesn’t it? But consider this: Across the same time frame, at least one of the premiums delivered positive returns during every single 10-year rolling period. In fact, far more often than not, two of them delivered positive returns during each 10-year period. The premiums existed, they observed, but they “do not move in lockstep.”

Check out Dimensional’s report to see the data for yourself. It offers a strong, continued vote for depending on steadfast diversification across multiple risk premiums to help you manage your risks in pursuit of your expected rewards.

At the risk of gushing, I am proud of you. I’m proud, because none of you (our clients) called us in panic or concern when the Dow Jones Industrial Average dropped more than 800 points on October 10.

A friend sent me a mid-day message that day: “Are your phones blowing up? People are losing their minds right now.” My message back: “You know we prepare folks to take the long view. Not one call.” As I publish this post on October 30, the market remains cranky. Who knows what’s in store in the short run? So far, Hill Investment Group clients, I remain delighted over your resolve, your mental toughness, your non-reaction when baited. Don’t get me wrong, I derive no pleasure from watching steep market declines. To an extent, I blame the media pundits. I can barely stomach the way they seize on the short-term gyrations to provide empty explanations. It grates on me to watch them leverage the market’s equivalent of a car crash, preying on our human frailties, knowing full well that fear will drive eyeballs their way. That said, there is rare advice to be mined out of the media. For example, The Wall Street Journal just released an amazing piece by UCLA behavioral economist Shlomo Benartzi, “The High Financial Price of Our Short Attention Spans.” Dr. Benartzi has so much good advice, I’d have to quote nearly the entire article to share my favorite parts. Perhaps this subhead will suffice: “Focus on the most relevant information, not the most available.” Or this: “Your biggest mistakes will come from overreacting to the latest stock swings, not underreacting.” Now, go read the rest (by clicking the link above). One way we strive to keep our clients on course here at HIG when others are “losing their minds” is to remind them of these simple, but powerful lessons:

1. Allocate intentionally. Your asset allocation was a decision we made together, based on the mix most likely to help you achieve your unique goals. Any random day (or month, or even year or few) shouldn’t change that.
2. Diversify globally. Your globally diversified portfolio typically includes roughly 12,000 stocks from the US and beyond. You’re already set to receive appropriate exposure to risks and expected returns from worldwide markets.
3. Rebalance habitually. Rebalancing sounds easy, but it takes guts, and is hugely important. It’s as close as we get to leveraging market moves, trimming high-flying asset classes (selling high) and restoring recent underdogs (buying low), according to your personalized portfolio plans.
4. Take the Long View.® Everything we do is about putting the math on your side. What happens in the short run is tough to predict. But we know what the science of investing says, and we’ve built your portfolio accordingly.

Combined, these four principles suggest that simple discipline may be the most important ingredient of all in becoming a world-class investor. I couldn’t tell you whether we’ve just experienced a random blip or the beginning of a bigger correction. But I am confident that we’ve prepared our clients for either outcome, and nearly any other permutation we may encounter.