Back in the days of sail-powered vessels, the fastest freighters on the sea were the clipper ships. Designed to bring back tea from China in the shortest possible time, they were proportioned for speed.1
Clippers were long and narrow with thousands of square feet of sail. To leverage all that wind power, they had a keel that went twenty-five feet below the waterline. This meant that to avoid running aground—one of the greatest disasters that could befall a ship—they had to stay in relatively deep water.
For cargo runs across the ocean, where you knew the sea to be deep, you couldn’t beat the speed of the clipper. But to get your cargo the last few hundred miles to its destination by river, you would use something much slower. The old sternwheelers could only move at a fraction of a clipper’s speed, but their shallow draft meant that they could safely navigate through water only a few feet deep.2
Even a major river like the Mississippi is full of hazards to deeper hulled ships. This critical shipping thoroughfare is riddled with sandbars and other underwater hazards that are not only hidden below the surface but are constantly changing. A clipper might go faster than a sternwheeler, but its risk of wrecking would be far higher.
Long term investing is often compared to an ocean voyage, where it’s clear sailing in deep water. But a better comparison might be a trip up a river, where you can’t predict what hazard might be lurking just a few feet ahead.
Keeping to this analogy, diversifying your investments is like spreading your cargo out across the hull of a boat that won’t have the fastest top speed, but has the best chance of getting you to your destination intact.
Despite its time-tested track record, there are three principles of diversification that many investors struggle with:
- Diversification requires you to consistently hold some asset classes you know in advance
will not be the best performers. - It requires you to resist the constant temptation to look back and think, “Clearly we should
have done something different.” - You must accept that the perfect conditions to abandon diversification don’t exist.
As decades of data have borne out, one of the surest chances of accumulating the wealth necessary for a fully-funded retirement comes with holding a truly diverse portfolio, controlling the factors you can directly influence (like disciplined saving), and not reacting to factors beyond your control.
The prudent investor knows that while others are fruitlessly chasing gains, he or she can team with their trusted advisor to continue along the plan created to best fit their unique situation limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.
Sources:
1. https://en.wikipedia.org/wiki/Clipper
2. https://en.wikipedia.org/wiki/Paddle_steamer
Disclosure:
The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.