Anything’s Possible

Parsec's Sarah DerGarabedian explains how portfolio diversification helps protect against limitations of our narratives’ predictive capacities.

I’m a huge fan of the ’90s sitcom Seinfeld. I’ve seen every episode multiple times, and many of its phrases appear in my daily lexicon. One that comes to mind frequently is when Elaine asks Jerry, “Is it possible I’m not as attractive as I think I am?” to which he replies, “Anything’s possible.”

You could replace the word “attractive” with any number of other words and it works just as well — smart, funny, prepared, calm, informed. You get the picture. And yes, in this chaotic, unpredictable world, anything is possible. As humans, we have a tendency to construct narratives — about who we are, how things work, and how and why they came to be. This is how we navigate the unpredictable nature of the world. To question the narrative, as Elaine does in that episode, is to become unmoored. It can be deeply unsettling.

The world of investing can be chaotic and unpredictable, as well, so we try to make sense of it by building narratives and making connections between discrete events, which may or may not actually be connected.

Where investors get into trouble is when they make changes to their portfolio based on their belief in the predictive capacity of these narratives. Is it possible that the Fed might decide to do X, which might cause the market to do Y? Anything’s possible. The better question is how likely is the Fed to do X, and how would that affect the portfolio in the short and long term? Notice the distinction here. I mentioned the effect on the portfolio, not the market. Depending on how the portfolio is constructed, it will follow the market to varying degrees. If the portfolio is anything other than a mirror image of whatever benchmark is being used to represent the market, it will not respond in exactly the same way. This is where diversification and asset allocation come into play.

Seasoned investors understand the benefits of diversification and appropriate asset allocation precisely because they recognize the limitations of our narratives’ predictive capacities. If you listen carefully to many of the voices in the financial media, in between rounds of punditry they will invariably reference the importance of diversification, asset allocation and staying invested throughout the cycle (although this advice garners far less attention than the more sensational bits, which drive viewer engagement). It is then incumbent upon the media consumer to discern what is noise and what isn’t. Again, what’s important is not whether a particular situation will materialize, but rather how likely such a situation is to materialize and how that could affect the portfolio. It may make sense to take some action if likelihood is high, but it’s almost never advisable to make huge shifts in response to speculation, particularly in a heightened emotional state.

As humans, we are riddled with biases and emotions and are unlikely to ever act as rationally as the academics would expect us to.

However, we can create space between the narratives and any resultant actions by revisiting the portfolio objective and reminding ourselves why we are investing. Is this a long-term goal? Is the asset allocation appropriate? Is the portfolio diversified? Is it built to weather different economic conditions? Discuss it with your advisor. It’s understandable to be concerned, particularly in our 24/7 news cycle, but try to spot the narratives and remember to stay grounded. As Jerry said, anything’s possible, but is it probable? More importantly, are you prepared?

Sarah DerGarabedianSarah DerGarabedian, CFA
Director of Investment Management

Share:

Recent Posts:

10 Ways to Celebrate Independence Day

I proudly served in the U.S. Army from 1991 to 1992 as a medic. My time serving makes me appreciate being a U.S. citizen. This holiday, I hope you do something enjoyable with family and friends. Here are ten ideas — I will likely do a mixture of them all!

Recent Quarterly Newsletters:

Thrive by Learning and Growing Edition

Read our Q2 2022 newsletter on how to thrive by learning and growing. CEO Rick Manske reflects on graduation season and what this time of achievement and change means for students and loved ones. CIO Bill Hansen writes about education savings; President Harli Palme writes about tax savings related to college expenses; Portfolio Manager Nancy Blackman cautions about hidden costs of college. Advisor Charles Thompson outlines why it’s important that we value and prioritize travel. Advisors Judd Meinhart and Hilary Daniel write about job transitions and what to do with your 401(k) and new benefits. Advisor Neal Nolan ends with 10 ways to celebrate Independence Day and we highlight announcements across our firm. We hope you enjoy this edition!

Thrive by Planning for the Unknown Edition

Our Q1 newsletter focuses on planning for the unknown. CEO Rick Manske begins with outlining the importance of implementing financial family fire drills. Sr. Financial Advisor Travis Boyer writes about handling risk and Director of Investment Management Sarah DerGarabedian discusses mindful investing and how according to Seinfeld, “Anything’s possible!” Financial Advisor Scott Kittrell outlines how to manage the increasing cost of health care, and Sr. Financial Advisor Michael Baughman covers how to determine if you need health insurance. Manager of Financial Planning Judson Meinhart provides helpful tables to fill out to determine if you have adequate property and casualty insurance. Co-Director of Tax Services Larry Harris writes about tax planning unknowns. We hope you find this edition insightful!

Recent Whitepapers:

Stay Up To Date With Parsec

Sign up to join our mailing list and receive quarterly newsletters, whitepapers, news, and more right in your inbox.