As we welcome the arrival of fall, we also approach a Presidential election—a time when market noise tends to increase. This is a good opportunity to remind everyone about staying focused on the long term and avoiding reactions to short-term fluctuations driven by headlines. Emotional decisions, especially in uncertain times, can lead to poor investment choices. We encourage you to stick with your long-term strategy and avoid knee-jerk reactions to political events. While it’s important to stay informed, patience is often the best course. During periods of market volatility, sometimes the smartest action is no action at all.
A well-diversified portfolio is key to managing risk in turbulent times. By spreading investments across different asset classes, sectors, industries, companies, you can reduce the impact of any one area underperforming. Recently, media attention has focused on a few large tech firms, but we’ve always emphasized the importance of diversification. Market leadership changes over time, and even the biggest names can stumble. Diversification ensures you’re better prepared to navigate these changes and stay on track for long-term success.
Since our founding in 1992, we’ve seen many shifts in market leadership. Technology investing, in particular, can be challenging due to rapid innovation. We’ve witnessed how Google overtook Yahoo!, the iPhone replaced Blackberry, and Netflix disrupted the DVD industry. As Nobel Prize winner Harry Markowitz said, “Diversification is the only free lunch in investing.” Market psychology and changing sentiments, combined with monetary policies, contribute to boom-and-bust cycles, like the dot-com boom-and-bust cycle of 1995-2002. By staying diversified and focused on long-term trends, we help navigate these cycles with confidence and stability.
At Cardinal, we’ve long managed diversified portfolios using a proprietary model that selects companies based on valuation metrics. Our approach is to look at a company’s historical valuation over 6-10 years and identify opportunities where the price and value seem out of balance. Our model is unbiased and uncovers good companies with attractive valuations that might be underpriced due to short-term issues. It’s our responsibility to determine whether those issues are temporary and if the company presents a real opportunity to be added to the portfolio.
When adding new opportunities, we also consider how to weight them in the portfolio. Unlike the seven mega-cap tech companies that currently comprise 32% of the S&P 500 index, we avoid concentration risk by applying strategic portfolio weightings. We spread our investments across various sectors to mitigate risk while remaining flexible to adjust based upon valuations. We also ensure that these companies are diversified across industries, so no one sector—like technology for example—is overly represented. This provides an additional layer of diversification.
Finally, diversification also applies over time. For example, an investor who invests $100,000 annually over ten years takes less risk than one who invests $500,000 a year for two years. The first investor is likely to benefit from investing across different market cycles, which can reduce volatility, even if both investors have similar risk profiles.
This disciplined approach has worked across many market cycles, including multiple Presidential elections. It allows us to focus on your portfolio’s long-term success without reacting to political outcomes or the daily noise that media outlets publish for attention. We believe this strategy will continue to serve you well as we move forward.
