Should Investors Focus on Portfolio Diversification Right Now?

As high inflation rages on and investors' nerves rock the markets, what can you be doing to better fortify your portfolio? in this segment of Backstage Pass, recorded on Jan. 5, Fool contributors Rachel Warren, Trevor Jennewine, Jason Hall, and Jamie Louko respond to member questions, discuss their approaches to investing in the current market environment, and the value of portfolio diversification. 

Rachel Warren: We have a couple of questions here from Vihaan. One of them he said, "My portfolio is in growth stocks, Motley Fool recs that's down about 22% in three months. What would you recommend with current trends in the market? Should you look at different sectors, REITs, dividend, value stocks? Do you change your approach for new capital or continue to add to growth stocks as they get beaten down?"

You guys want to share your thoughts on this? Anyone feel free to jump in.

Trevor Jennewine: Sure. Vihaan, I think you'd get a lot of different answers to this, so maybe we can each add a couple of sentences here. But I'm not going to change my strategy.

I'm in a similar boat. My portfolio is down 18%, 19% which is fine. I have plenty time before retirement. I'm still looking for those high-quality stocks I can hold for 20 years.

The short answer is no, I'm not going to change my strategy. I am building up more cash on the sidelines right now.

This ties into another comment. It's difficult to know when to buy and I don't think any of us know where the bottom is. I never deploy all my cash at once. I just buy on the way down in intervals. That's my take here.

Jason Hall: Jamie, jump in and then I'll follow up.

Jamie Louko: No. Trevor took the words right out of my mouth. I'm in a very similar boat. I'm not changing anything. I'm going to keep buying stocks. I love high-quality stocks on the way down.

Hall: I think your investing style has to, you have to have a philosophy that matches your long-term goals, but also your psychology. But it has to be something you're comfortable with.

It has to be something that you can repeat over over time and not let your emotions take the wheel. I think that's really super important. FoolFan,  yeah so the idea about, can the drop continue? Talking about a lot of stocks are down 50%.

Absolutely it can. [laughs] I mean sure. How many times has Amazon fallen, 80% since it went public, like six or seven. They didn't all happen the first week it went public. I mean, a lot of them happened 10 years, 15 years after the company went public.

Absolutely. Your time arbitrage is how you make that a non-risk for yourself. I call it the -- now I can't even remember what I call it -- the precision fallacy. You try to catch the perfect price.

You'll never going to catch the perfect price. Invest at a price that you are happy with, that you think can generate meaningful returns after that, when you get to your goal. I think that's all you have to do.

Then to the question about your philosophy and style. Maybe a mix, maybe that's what would be helpful right now for anybody that's really heavy in tech stocks.

If you're really struggling with looking at your portfolio and seeing how far it's come down recently. Maybe some balance and owning some REITs, owning some dividend stalwarts to give you some balance.

As Andy Cross calls it, like those balance stocks like the Berkshire Hathaway's and the Home Depots, and the real estate companies, that kind of thing. Maybe that'll help you ride it out, because your whole portfolio won't be down 22%. So, few different things to think about.

Jennewine: I'm going to jump in and add on what Jason said. I'm not completely invested in tech stocks. I do have some REITS in there, some dividend payers so I think that's great advice.

Warren: I think that's also why it's so important to have a well diversified portfolio. Even if you love tech stocks, or if you're like me I love healthcare stocks.

I try not to over-concentrate too much on a particular stock or sector. But I do also think like you guys were saying it very much goes back to what you're comfortable with.

If you're buying stocks that you're intending to hold for many years at a time, and you're not so much worried about those day-to-day dips, it can be a great time to continue to buy great companies that are trading down, and just know that it might take a little time for your portfolio to meet that long-term growth trajectory.

On the other hand, you can also use this opportunity to invest in more traditional value stocks and in sectors that are often less affected by these types of market movements.

I can say for myself, most of the tech stocks in my portfolio are down right now, while my healthcare stocks are actually doing quite well.

So that has helped to really balance out my holdings and some of the volatility I've been seeing there.