The Power of Diversification

Since my junior year in high school, for nearly 40 years, I have read the Wall Street Journal almost every day it has been published.

For almost a month, I have carried an article from the Wall Street Journal around with me, because I wanted to share the story in our blog.  The headline read…. “GE….Burned Out..This is the story of how General Electric lost power.“**

When I read this article the weekend it was published, Saturday, December 15th, I knew I had to write about it.  The story of GE and its stunning demise was too important.   The article covered part or all of 8 pages. This was the longest article I can remember seeing in the Journal.

In August 2000GE was the most valuable company in the US, with a market value of nearly $600 billion. For perspective, Apple is worth $721 billion today.

While GE was worth $600 billion 19 years ago, today it is worth only $76 billion, almost one-tenth of its prior peak. The stock price has gone from a top of nearly $58 per share to a low of $6.61 and has recently climbed back to $8.76. GE has also cut their dividend dramatically, from 96 cents per share in 2017 to its current 1 penny per quarter, starting in December 2018.

The WSJ article highlights some of the errors and decisions which led to this dramatic downfall. GE was widely revered for its outstanding leadership and top executives, yet has suffered from many poor decisions and bad timing. If you are interested in management and business, I highly recommend reading this article. It is a real eye opener.

As I read the stunning details of GE’s demise and the many serious issues which they still face today, I thought about the lessons from the perspective of our financial advisory practice and some of our key investment philosophies.

We are strong advocates of broad diversification, across companies, sectors and geography. We generally do not believe in owning individual stocks as part of an investor’s core portfolio.  Declines as occurred in GE’s stock has occurred at other companies, and will happen to others in the future. This is why we advocate our philosophy of diversification.

One-time very successful companies can become stock market failures. And vice versa. There is no way to reliably predict which companies and stocks will be the most and least successful over the long term…say 5, 10, 20 years, let alone over months or a few years.

Sure, there are stocks which continue to do well and look like great investments, in hindsight. We feel that most investors would be better off owning broadly diversified funds, rather than trying to pick 10-20 stocks and concentrate their portfolio. The risk of a few stocks blowing up, such as what occurred at GE, is too great a financial risk for most people.

We must acknowledge that one of the downsides to our philosophy of broad diversification and asset class investing is that some of the funds that we recommend for our clients have owned GE in the past and a number of funds still own very small amounts of GE today.

This is the nature of asset class investing, which means that a mutual fund will own hundreds or thousands of stocks, based on the purpose or objective of that fund. The key is that rather than a stock like GE being 5 or 10 percent of your portfolio, a fund or ETF today may hold far less than 1% of GE in its portfolio. In this manner, your upside and downside of any one stock is limited.

While the WSJ’s reporting of GE’s past problems and future challenges is insightful, it should not be guidance for your investment decisions. The WSJ nor other financial media or Wall Street prognosticators did not predict the huge decline of GE in 2000. We cannot predict its future success or failure.

However, we feel that our strategy of broad diversification will minimize the impact of a single stock having a major negative impact on your financial future. We hope that brings good things to your life!


**Cite: “GE, Burned Out,” Wall Street Journal, print edition, page B1, December 15, 2018.(To view and have access to the article online, you must subscribe to WSJ or already have a WSJ account.)

Disclosure: GE stock is held in various funds that our clients may own. For illustrative purposes, as of 11/30/2018, GE is 0.105% of DFA US Core Equity 2 Portfolio, 0.281% of DFA US Large Company Portfolio, and 0.231% of DFA US Large Cap Value III. GE is held in additional mutual funds as well.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *