Resources/Weekly Insights

Volume 14, Edition 4 | February 9 - February 15, 2025

It’s a Love Story

Doug Walters, CFA

Valentines Day is a perfect time to fall in love with your portfolio all over again. There is so much to love about the peace of mind that comes with an intelligently diversified portfolio.

Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson

Valentine’s Day brought with it the opportunity for the movie streaming services to give some classics a push, like Love Story: “Love means never having to say you’re sorry.” In the world of investments, a similar sentiment often surfaces, albeit with a twist: “Diversification means always having to say you’re sorry.” I admit I’ve used the phrase before in jest, but its message is perhaps even more off the mark than the original from Love Story. Let’s delve into why.

The Origin of Guilt

Where does this unfounded guilt come from? Let’s dive in. Diversification, by its very definition, means your portfolio will always include some underperforming assets. Not every asset can go up all the time by the same amount. That is a ridiculous notion. Therefore, unless you only own one security (yikes!), then there will always be holdings that lag the leader. Adding fuel to the emotional fire, as humans, we tend to feel the downs more pronounced than the ups. Psychologists call this loss aversion. So, while all science points to the merits of diversification, it doesn’t always “feel” good.

What’s more, when equity markets are ripping thanks to a handful of mega-cap companies, a well-diversified portfolio will generally lag those equities. While this is exactly what it should be doing, again, it doesn’t necessarily feel good. When equity markets are crashing, as they’ve been known to do, a well-diversified portfolio will generally outperform. But negative returns don’t feel good, even if you are outperforming. Over the course of a full cycle, smart diversification may produce higher returns, but it never felt good along the way.

Sorry, Not Sorry

Portfolio managers are sympathetic about the above emotional dynamics. We get it. But we need not be apologetic. Diversification is as fundamental to best-in-class portfolio management as flowers and chocolate are to Valentines Day. It is in the best interest of long-term investors. It is an act of fiduciary, evidentiary love. The alternative – speculative, concentrated risk taking – is irresponsible at best, malpractice at its worst. In the end, good investment managers will be doing what is best for their clients’ portfolios, not necessarily what feels best.

So, on this Valentines Day weekend – with International, Emerging Markets and Gold all outpacing US stocks year to date – take a moment to celebrate the intellectual beauty of a well-diversified portfolio. Have a look at your own portfolio and talk to your advisor about how each piece contributes to protecting and enhancing your financial well-being. Be confident in the knowledge that diversification means never having to say you’re sorry. It’s a love story… just say yes.

3.0%

CPI Inflation

Inflation, as measured by the Consumer Price Index (CPI), came in at 3.0%, slightly higher than the 2.9% expectation as well as last month’s 2.9% reading.

Headline of the Week

Give and Take Part II

Inflation reports this week mainly took from rate cut expectations. Thursday’s Producer Price Index (PPI) report seemed to give a little hope on the inflation front. At first the PPI seemed to confirm Wednesday’s Consumer Price Index (CPI) report’s picture of stubborn inflation. However, under the covers, areas where the Fed normally focuses came closer to expectations and did not paint as dire of a scenario as the CPI report. It was noted widely that there are some unique aspects to January numbers due to annual price setting exercises by many companies. Also, the depth and breadth of any tariffs remains a challenging question. And finally, Fed Chair Powell visited Capitol Hill to reiterate the Fed’s focus on data and the emphasis on patience. Employment and prices seem to be in an awkward state of equilibrium with neither too strong nor too high. Thus, the Fed may stay on hold for a while yet.

The Week Ahead

With a holiday-shortened week and a data-light calendar, at least domestically, look for President Trump’s broadcasts to be the main culprit of market direction. There is plenty of action abroad, but nothing earth-shattering and the earnings reports are also light with Walmart being the biggest name on the calendar.

Light Impact

The minutes of the most recent Federal Reserve meeting lack sizzle since there was no change in policy.

Chairman Powell was non-committal at the last press conference and faced a grilling in Congress this past week, so not much new is expected from the minutes.
The central bank has reset expectations for rate cuts this year from four to just two.
Chairman Powell tried to downplay some language changes in his statement to language clean-up not a policy change, leaving the minutes as a chance for us to judge for ourselves.

Heavy Load

Walmart earnings on Thursday will include the holiday shopping season for the nation’s largest retailer.
Walmart’s fourth quarter is expected to generate $0.65 per share of earnings on an astonishing $180 Billion in revenue.
The stock is at an all-time high, up about 85% in the past year as price conscious shoppers seek out lower prices to combat inflation.
The retail giant offers potentially useful insight into not only inflation, but also the fallout from the tariff talk.
Consumer sentiment dropped in February to a seven-month low, and inflation expectations have been boosted as well, so soothing commentary from Walmart could be particularly useful.

Birthday Party

Happy President’s Day!

We celebrate the contributions of both Presidents George Washington and Abe Lincoln to this country during the month of their birthdays.
U.S. Markets are closed on Monday in observance.

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