Sink or Swim – Knowing When to Diversify in a Bull Market

John Diehl   |  Wed Sep 06 10:00:00 EDT 2017


Investors have been reaping the benefits of a sustained bull market for some time now, which may instill in them a false sense of security and lead them to lose sight of risk levels in their portfolios.

While bull markets can be good news, they can also make your clients more susceptible to the hot hand fallacy – a term used to describe the behavior of expecting future results to mimic past results. In other words, since bull markets tend to encourage investor optimism, your clients may expect this upward streak to continue and, in turn, go “all in” with their investments.

Advisors need to help their clients avoid getting carried away by the long-running bull market by instead using it as an opportunity to help build understanding around why diversification matters in all market environments, particularly in times when investors become overly confident.

Portfolio diversification is crucially important for several reasons:

Expecting the Unexpected
Historical market data illustrates that market corrections are inevitable and unpredictable. By focusing only on the near-term trends, investors could be leaving themselves vulnerable to larger losses, not just potentially enjoying larger gains. Help keep your clients in check by borrowing examples from history to show them that a downturn could have a more devastating impact if they’re not expecting it (and if they’re not properly diversified).

Training for the Marathon, not the Sprint
When it comes to building and managing an investor’s portfolio, long-term goals are ultimately the benchmark. Advisors are tasked with helping their clients achieve their individual, overarching goals, which takes time and patience. Over many years, the market will have ebbs and flows, but a diversified portfolio can help investors weather these storms. It’s not about making fast cash now; it’s about being prepared for both the ups and downs over time and hopefully achieving the intended objective in the end.

Balancing the Bad with the Good
While it is easy to feel invincible when the going is good, having a diversified portfolio can also help investors feel protected when the going gets rough. With diversification, when one asset lags, another asset can pick up the slack, helping investors mitigate the pain of a downturn. Advisors should explain this give-and-take to investors so that they understand that diversifying their assets can help them participate in the ups while also hedging devastation in the downs.

For these reasons and more, diversification remains an important component of building a sound portfolio. While enjoying the benefits of a bull market, advisors should be careful not to get complacent, and not to let their overly confident clients get too audacious. Continue to preach diversification even during a bull market, so that clients don’t get stuck by their proverbial horns in the end.

All investments are subject to risk, including the loss of principal. Diversification does not ensure a profit or protect against a loss in declining market.


John Diehl

John Diehl  

Senior Vice President, Strategic Markets Hartford Funds

John Diehl is senior vice president of Strategic Markets for Hartford Funds. He and his team are responsible for engaging and educating financial advisors and their clients about current and emerging opportunities in the financial-services marketplace. These opportunities range from tactical strategies in areas such as retirement-income planning, investment planning, and charitable planning, to anticipating and preparing for long-term demographic and lifestyle changes. John also oversees Hartford Funds’ relationship with the Massachusetts Institute of Technology AgeLab.

John joined the company in 1988 and was promoted to assistant vice president in 1991 and vice president in 1997. He was named senior vice president in 2007, while he led the Retirement and Wealth Consulting Group, which was responsible for building awareness and knowledge of retirement challenges and the latest planning strategies to address them. In 2012, John was named Senior Vice President, Strategic Markets; in this role, he devotes his efforts to serving the needs of financial advisors and their clients.

John has been widely quoted in consumer and trade publications such as The Wall Street Journal, Financial Planning, and On Wall Street. He has also appeared as a featured guest on CNBC and Bloomberg Television to discuss his views on retirement-related topics.

John attended Moravian College in Bethlehem, Pennsylvania, where he earned a bachelor’s degree in economics. He has been a CERTIFIED FINANCIAL PLANNER™ (CFP®) since 1991. In addition, he holds the Chartered Financial Consultant (ChFC®) and Chartered Life Underwriter (CLU®) designations. He is also FINRA Series 6, 7, 63, and 26 registered and holds a life and variable insurance license.

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