For those who watch the big thoroughbred races this time each year, you’ve witnessed history. Not only did you see the first Kentucky Derby to have the first-place finisher disqualified and its jockey suspended, you also saw a horse with no jockey finish the Preakness Stakes.
What can we learn from this? Maximum Security went into the Derby a favorite. With more than $6.2 million dollars placed on the colt to win, he seemed like a sure thing. The more bets placed on him, the more of a favorite he became. Then, the unthinkable happened. In addition to not finishing in the money, he ended up placing last after a disqualification.
Stocks have experienced similarly surprising boom to bust events since the advent of market exchanges. The correction of the dotcom bubble in 2000 is a well-known example of investments going from favorites, or “hot picks”, to a great fall. After so many invested in what they considered sure bets to increase their wealth, many faced significant losses (the NASDAQ fell 78% during the correction).
Rather than attempting to guess the next best stock, bet on diversification. If someone had spent $1,800 on bets across-the-board (finish in first, second or third) for each of these horses: Maximum Security, Country House, and Code of Honor, spreading out their bets, they would have collected nearly $24,000. One who bet the same $1,800 on only Maximum Security to win, would have walked away with nothing.
Diversification is key. History has shown that investing in a broad stock and bond portfolio and sticking to it has never resulted in a negative 5-year return*. An example of the benefit of diversification vs. picking just one to win in the short term is reflected in the S&P 500’s loss of 4.4% in 2018 to Facebook’s loss of 25.7% and Snap Inc. (think Snapchat) loss of 65.2% in the same year.
If you are willing to take some risk and you enjoy the thrill of the market “races”, place some bets. But, if you want the greatest chance of success, don’t bet it all on one runner.
Jeanne Kelsey Fritchley is CIC’s Chief Operating Officer and Firm Principal based in Charlotte, NC. Click here to learn more about Jeanne.
Nothing contained herein constitutes financial, legal, tax, or other advice. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Carolinas Investment Consulting. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. All information, views, opinions and estimates are subject to change or correction without notice. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. These opinions may not fit to your financial status, risk and return preferences. Past performance is not indicative of future returns.