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As we went to press, the yield curve was inverted, chatter about the prospects of a recession occurring continued, the trade war remained in the headlines and gold was at a multi-year high. Not the type of events associated with expectations for the foreseeable future to be hunky-dory.

It’s tempting to react to headlines, especially when they suggest a reason to be cautious. Not giving in to such temptations will leave you better off. Why? Because the risk of making a mistake by reacting to headlines or the outcome you think might happen is far greater than the risk of what might happen to your portfolio if you simply stick with a disciplined, well-thought-out long-term strategy.

Consider this: While the odds of the S&P 500 index experiencing a loss for any single calendar year is about one in four, the odds of it falling over a five-year period are less than half of that. The longer your time horizon, the greater your odds of increasing your wealth if you don’t react to the day’s headlines.

Of course, the ability to stay calm varies by person. One investor’s tolerance for risk is different than another’s. This is where diversification plays a role. Buffering your portfolio against market volatility by holding a mix of assets can help you stay invested. You can also diversify within the asset classes to better spread around company-specific risk.

In this month’s issue, we have articles about diversification from two of our new contributing editors, Craig Israelsen and Paul Merriman. Contributing editors are experts we will feature in the AAII Journal throughout the year. These are people we’ve personally reached out to for both their investing knowledge and their ability to educate investors. We’re excited to have both Craig and Paul write for us more frequently.

You’ll notice their different takes on diversification. There isn’t a single right way to diversify that applies to every person. What is universal about diversification is the need to stick with the strategy you’ve chosen. When you don’t stick to your chosen diversification strategy because of the prevailing headlines or other scuttlebutt, you lose the benefits you would have realized by adhering to it.

One simple way you can diversify is by mixing bonds with stocks. Bonds not only provide cash flow, but they can also help to dampen a portfolio’s volatility, thereby increasing your financial and psychological ability to stick with stocks.

Investing in individual bonds gives you more control and portfolio customization, but it’s not for everyone. Bond funds give you professional management, but they never mature. Rather, you only get your principal back by selling the fund at whatever the prevailing price is, which may be higher or lower than what you paid.

A third option is defined-maturity bond funds. These hybrid investments are professionally managed funds. You can buy and sell them just like other mutual funds and exchange-traded funds (ETFs). Unlike traditional bond funds, defined-maturity bond funds mature like bonds do. Once all the underlying bonds held in the portfolio mature, this type of fund distributes its assets to the remaining shareholders and ceases operation.

I first wrote about defined-maturity bond funds in October 2013 when they were still pretty new (“Defined-Maturity Funds: A Bond Alternative With Compromises”). Since several years have passed, I decided to revisit them.

BlackRock (which owns iShares), Fidelity and Invesco (which acquired Guggenheim in 2018) provided me with data about what’s happened to these funds at liquidation. Most of the time, an investor who bought a defined-maturity bond fund when it was launched and held it to maturity realized a modest capital gain. For an investment product like this, you’d want the fund’s ending net asset value to be approximately what it was when it started. The fact that most of them have realized small gains is a nice plus. You can see the data about these funds here.

Also in this month’s issue, my colleague Derek Hageman discusses Sir John Templeton’s bargain-hunter approach to investing in stocks. Given the recent headlines, some of you may find his contrarian strategy to be of interest. And even if things turn out to be better than expected, buying stocks at a price below what you can reasonably expect someone else to pay in the future never goes out of style. Derek’s article starts here.

Wishing you prosperity,