Yesterday, United Wholesale Mortgage (UWM), America’s largest mortgage wholesaler, suffered a loss of over 34%. If that was an investor’s only holding, it would have been a rough day. But if the investor’s portfolio was diversified, it may not have felt so great, but the importance of diversification would have been apparent.
Say, for example, the investor owns 32 equity securities (stocks), and UWM was one of them. UWM share prices have fallen 72.6% YTD. Meanwhile, if the investor’s other equities have performed as well as the S&P 500, the remaining portfolio is up 12.6% YTD. Combine the loss of UWM and the market performance of the remaining equities, and the investor’s portfolio (if equal-weighted) has returned 9.9% YTD. A more appealing return than -72.6%.
Harry Markowitz, the inventor of the Efficient Frontier, called diversification “the only free lunch in investing.”
Action Line: When you want to talk about diversification and your portfolio, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
