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Saturday, February 23, 2008

The Emotional Value Of Asset Diversification

The stock market has been pretty gut wrenching for us in 2008. The overall returns have been mainly in one direction - negative. While I usually do a quarterly update of our financial situation, I decided to do a mid-quarter analysis this weekend. Not surprisingly, our retirement savings are down this year, by 12.3%.

When I did an analysis by the main investment component of the accounts (e.g cash and fixed income, stocks and stock options), I noticed there was a significant difference in returns depending on the type of investment. In addition, the order of returns by account flipped between 2007 and 2008 YTD. The analysis is shown in the table below.

Returns By Year
Main Component of Account2007 overall2008 YTD
Cash and Fixed Income

6.5%

-0.2%

Equity

14.4%

-8.1%

Stock Options

64.9%

-31.5%

Total Investments

18.5%

-12.3%



The results in the table were not unexpected. The surprise was that with asset diversification I could usually be happy with at least one segment of my investments, although it may be a different segment each year. Last year, we were very pleased with how well my company's stock options were performing. This year, I am very happy that we have a portion of our savings in cash and fixed income. Although I don't know which one, it is likely I will be pleased with returns of a segment at the end of 2008. Hopefully, that segment will also have a large positive gain :-)

For more on Reflections and Musings , check back every Saturday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

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