ETF Expert

If you read or listen to experts on happiness, they will tell you all about "living in the moment." The past is yesterday’s news. And… why worry about tomorrow?

Financial planners have a slightly different take. You should worry about having enough money in retirement. The implication is… if you don’t have enough money in your future… you won’t be too happy.

Yet when it comes to the investment guidance itself, most advisers tell you not to worry about the markets you’re invested in. The logic? You must have a "long-term perspective" and all markets will rise over the "long-term."

Unfortunately, most stock market investors lost 50% of their money from 2000-2002. And they are still trying to break even here in 2007. How happy are these folks?   

In truth, it is important to stay "in touch" with the investment markets; that way, you can minimize the risk of severe loss.

Selling certain assets to protect gains and/or principal is one tool. Diversification is another.

It is easy to see diversification in action. For instance, here is a 3-month chart of major asset classes: Stocks (S&P 500 Spider SPY), Bonds (iShares 1-3 Year Treasuries SHY), Currencies (Rydex CurrencyShares Euro Dollar FXE) and Gold (Streetracks Gold GLD).

As U.S. stocks have been under pressure, the Euro has held up better than the U.S. dollar and shorter-term bonds have  been in demand. Gold has also shined recently.

When you look at a 1-year chart, however, it’s easy to begin thinking that stocks always outperform. And by extension, why diversify across any other asset class? (Stocks get you 10%+ per year… what else do you need?)

Ahhhhh… but if we walk further out on the horizon. How about 2 years?

Stocks give you that 10%, but gold and the Euro provided quite a boost. 

Granted, stocks have outperformed nearly every asset class over any 10-year time period. And that is why exchange-traded stock funds should play the largest role in most portfolios. (I don’t have a chart for you… but it’s true. Stocks are the best performing asset class in nearly any 10-year picture.)

Nevertheless, we live in the financial moment… not 10 years out. We live with crisis, war, uncertainty, fear, greed, excess. And it follows that nobody is "happy" when he/she suffers huge losses in a 2-3 year stock market bear.

So why do we diversify? We diversify to reduce the uncertainties and risks of today. We diversify so that we can be less fearful in the present. And, we diversify to avoid huge bear market losses so that… ultimately… we have more financial freedom in the future.

Disclosure Statement:  As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.