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Eggs and a Basket

May 30, 2023

I’m the youngest of three in my family (Yes, I’m the baby). Every year on Halloween, my older brother and sister would hype me up to go Trick-or-treating. They would sell me on the dream of how exciting it would be to knock on doors and get tons of candy. I mean, what kid wouldn’t be pumped about that? In my naïve innocence, I didn’t realize the selfish motive behind my siblings giving me attention. They simply wanted me to do all of the work, bring home the candy, then they would steal some of it when I wasn’t looking.  Safe to say I have trust issues at this point in my life. BUT I did learn a valuable lesson at a young age –– Split the candy into different bags and hide some of it in different places.

‘Don’t put all of your eggs in one basket’ is a simple phrase we are all taught when we are young. Diversification is a defensive measure to protect us from as much risk as possible, especially when we’re hiding candy from our siblings.

In case you aren’t aware, banks have been in major news headlines for almost all of 2023. Silicon Valley Bank had to be bailed out, mostly because of poor investment strategy where they decided to buy long term bonds. First Republic Bank, which has been listed in the S&P 500 since 2018, has now been taken over by JP Morgan. It’s a harsh reminder that no matter how well established a company is, nor how loyal and wealthy their customers are, ANY stock can drop to zero at any point. This has been a reality check for everyone about the importance of diversification, which is one of the main principles when it comes to investing.  We may think we know more than other investors, but none of us know more than the market.

If your wealth is highly concentrated in any one individual stock, you are opening yourself up to inherent risk. One way to begin diversifying from investing in an individual stock is to consider an index fund that follow the performance of an index, such as the S&P 500 index, which contains some of the biggest stocks in America.  If you owned First Republic Stock on January 1st of this year, it was worth $121 per share. Now? It’s worth less than 50 cents. On the day it was announced that First Republic would be bought by JP Morgan, the S&P 500 index was only down .039 percent.

In the graphic below, you can see the top 10 holdings in the S&P 500 over the last 30 or so years, as well as their cap-weighted percentage within the S&P.  There are many lessons to be learned from this example. For today, I will focus on two main ideas.

The first is easy to understand as we look at the turnover throughout the years. How many stocks are still in the top 10 after 10 years? 15 years? 20 years? At that time, how many of us would have bet money that those companies would stay one of the biggest companies in America? Time after time, that belief is not true. It’s called recency bias, meaning a company is doing well today, we believe they will always succeed in the future. Of course, no one can predict this, even though we all try to predict the future.

The second important note about investing today is to look at the S&P 500. Many of us have been advised that buying a fund that follows the S&P 500 Index is considered diversification. Currently, Apple makes up over 7% and Microsoft makes up over 6%. So, the two largest stocks make up over 13% of the S&P right now. Is that really diversification?

Most of us tend to understand risk when it comes to buying one stock. But there is still a shock factor if that stock drops to zero. Despite how many times my older siblings told me they would not take my candy, I still had to do my own due diligence to ensure that I separated my stockpile of sweets and spread out my own risk to protect myself.

While we aren’t investing in candy stocks, we still need to ensure we’re adopting this same idea within your investment portfolios.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5280 CARROLL CANYON ROAD, SUITE 300, SAN DIEGO CA, 92121, 619-6846400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WESTPAC WEALTH PARTNERS LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License Number – 0L49687. | This podcast is for informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.  Guest speakers and their firms are not affiliated with or endorsed by PAS, Guardian, or WestPac Wealth and opinions stated are their own.  Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. All investments and investment strategies contain risk and may lose value. | 2023-158307 Exp. 07/25 | Georgia Independent Operators Association (GIOA) is not an affiliate or subsidiary of PAS or Guardian. | Past performance is not a guarantee of future results. Indices are unmanaged and one cannot invest directly in an index. Equities may decline in value due to both real and perceived general market, economic and industry conditions.

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Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5280 Carroll Canyon Rd, Suite 300, San Diego, CA, 92121, 619-6846400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WestPac Wealth Partners LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License Number - 0L49687. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC.  (619) 684-6400. PAS is a wholly-owned subsidiary of The Guardian Life Insurance Company of America® (Guardian), New York, NY. CA Insurance License #0L49687 | Terms of Use | Online Privacy PolicyImportant Disclosures |  2023-158307 Exp. 08/25