A family friend had recently retired and finally had his dream home – on a golf course. This was the kind of course where he and his wife could leave their spacious back yard and play a few holes before the morning golfers came through the 6th hole, or, before sunset after the last groups passed by. They loved the social aspect of being so close to so many club activities as well, so it was ideal for their retirement years.
Their investments needed to perform well to sustain this kind of home and hobbies, and the golfers on the course needed to play well too. You see, this home was about halfway down the fairway, right in the area where a golf ball might land from time to time, and the occasional bad shot was sure to find its way to one of these few homes along the 6th fairway. So there was always some risk as each group played through that hole.
This couple wanted to enjoy their dream home and the nice view they had over the 6th fairway and to the trees beyond. They had a large window that spanned the entire kitchen, living room and dining room so that they could take in the view throughout their day. This window was big… and expensive.
As you can probably guess, one day a hard hit tee shot came their way and rather than landing in the yard, or in the pool, or hitting the side of the house, or the roof, this particular ball hit their beautiful window. CRASH!
What a mess! After the cleanup, they called the insurance agent and their contractor and the news became worse. Insurance won’t cover the damage because it was too high-risk of an incident and was excluded, and the cost to replace the window was going to be substantial, given the size of the glass.
The contractor began to go through some different options to either replace the old window or consider something new. The homeowners’ were looking at the different window options when their “a-ha” moment occurred. “Why don’t we get a sectional window with 15 or 20 smaller panes of glass?” she asked. Brilliant.
And so it was decided that they would replace this giant piece of glass with an equally well designed array of glass sections to preserve their great view, and they could rest easily knowing that the next time a golfer hooked a tee shot towards their house, it wasn’t going to break the bank—or the entire window. Even if a ball came their way every few months, they could replace just one small piece of glass here and there and it wasn’t going to be much of a problem in the long run.
Now how does this teach us anything about investing? Well, if you have an investment portfolio and you know that every once in a while the market is going to experience some extreme volatility and may take a big hit, how should you invest? On the one hand, you could pick a few brand name stocks or even an index like the S&P 500. That type of portfolio might do well most of the time. On the other hand, you could pick a globally diversified portfolio representing many different parts of the world and multiple asset classes that spread money more evenly across all of these sectors, and that might do well most of the time too.
But when rare events and market shocks occur, much like a golf ball flying towards your house, would you rather have one big window pane, or many smaller panes? Would you rather have just a few stocks or a single index when that crash hits, or would you rather rest more comfortably knowing that it isn’t a big problem because you have spread your risk across the entire portfolio by using a diversified approach with several smaller investments?
If this sounds like the right approach, please contact the CCMI team and we would be happy to talk more about the value of portfolio diversification.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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