By Katie Cuccia Hebert, MBA

What I would like to discuss with you today is the importance of diversification. Not only diversifying across various companies, but across various countries as well.

This chart shows the 20 most valuable Fortune 500 companies from 1995 to 2020. And over the course of these 25 years, you’ll see the companies in this group change.

So let’s say, for example, you have your entire portfolio invested in Exxon. And as you can see right now, Exxon is pretty close to the top of the chart.

What you’re missing out on, though, by only having your investment portfolio invested in Exxon is the growth that these other companies that are on the chart are experiencing.

You’re not able to capitalize on any of this other growth because you don’t have any investments in these other companies. You’re only invested in Exxon.

If you notice, there’s one big company that’s missing on the chart right now, and that’s Apple. So you’ll see Apple come up here in just a little bit, as well as Google and some other technology companies as well.

The technology companies here are represented in yellow. And as we go through the 2000s, you’ll see the yellow companies. So those technology companies start to dominate the chart.

For diversification, in our portfolios, we use mutual funds and exchange-traded funds, which are essentially a basket of stocks that allows an investor to hold hundreds of stocks across multiple countries and industries. Our portfolios, in particular, are diversified in over 40 different countries. And we have exposure to over 13,000 different companies.

The benefit of investing in a mutual fund or an exchange-traded fund versus holding a single-company stock is that should one of the hundreds of companies in the mutual fund underperform or no longer exist, you have all these other companies that are able to offset that underperformance—versus if you’re only invested in Exxon, like in our example, and Exxon were to go under, then you don't have any other companies to offset the loss because you’re only invested in Exxon.

So, by diversifying, investors are able to spread out their risk and greatly reduce the chance of a catastrophic loss.

You can see Apple is now on the chart. Exxon is still doing very well. They’re number one right now, but as you can see, a good portion of the chart is actually made up by technology companies, and you’re missing out on all that growth that those companies are experiencing because you’re not invested in them.

Now, the stock market overall is extremely unpredictable. It’s nearly impossible to determine which company will continuously outperform its peers. A common misconception is that people tend to think our industry is able to predict the next big stock or there’s some kind of crystal ball and we know what stock will produce a high return in a short amount of time.

However, that’s just not true. And this is why mutual funds and exchange-traded funds that allow you to invest in multiple different companies across different industries and across different countries provide broad exposure across the board.

So when we see particular sectors like the technology sector, which is dominating the chart right now—when you see a sector like that, that’s performing really well, with a mutual fund or an exchange-traded fund investment, you’re able to participate in the growth of that company. And in return, you see your investments increase.

So you can see right now that Exxon is slowly making its way to the bottom of the chart. And it is actually no longer on the chart and is not one of the top 20 most valuable companies at the end of 2020.

Now, the next thing I want to look at is diversifying amongst different countries. So the same principle that we just looked at with diversifying amongst different companies can also be applied to investing in different countries as well.

This chart right here shows different markets. You have the U.S. market in blue, you have emerging markets here in yellow, and you have developed markets here in red.

So emerging markets, that’s going to be China, Brazil. Developed markets are going to be countries like Germany, Australia, the United Kingdom.

Now, this chart goes back to 2003. And the first 10 years of the 2000s, from 2000 to 2009, it’s called the lost decade because of the underperformance of the S&P 500 index at that time.

However, in the early 2000s, you can see here that emerging markets in yellow and developed markets in red outperformed the U.S. markets during that time.

So if you were only invested in U.S. companies, you would have missed out on all the growth that the developed and emerging markets provided during that time.

And it really hasn’t been until recent years that the U.S. has begun to outperform developed and then emerging markets as well.

So if you were to be invested across different countries throughout the world, then you would be able to capitalize on the growth that these other countries might be experiencing relative to the growth of the U.S.

We use this principle and investment strategy with all of our clients. And because we have exposure to over 13,000 different companies across over 40 different countries, we’re not having all of our eggs in one basket.

And we’re able to benefit from exposure to both domestic and abroad, as well as reduce the risks that our clients take.

To discuss how a diversified portfolio can help achieve your goals, schedule a complimentary 30-minute discovery call with one of our Wealth Advisors.