Boeing is the Latest Lesson in Diversification

Freddy Lim

Co-founder and CIO

15 March 2019

Only have 30 seconds? Here's what you need to know: 

  • With two tragic plane crashes within 5 months of each other, Boeing’s share price went down 14.8%, from $440 USD to $375.41 USD between 1 March and 12 March. This situation perfectly demonstrates why diversification is so important for investors. Any great company, even one operating in a duopoly, can face unforeseeable events and see its stock price plummet suddenly.
  • Growth-oriented assets have so far performed well in 2019, but this strong short-term performance shouldn’t have undue influence on your investment plan. As we told you not to panic in December, do not get over-excited now; just stick to your plan! After all, the key to successful long-term investing comes from being systematic about your way of investing. Market timing can be a costly exercise when not done correctly, and the odds are low for getting it right. 

Editorial note: Our thoughts go to the families affected by the two recent plane crashes. We’re using this example solely to draw investment lessons that can illustrate how quickly and unexpectedly even a large, reputable company’s share price can drop, and how that can affect an improperly-diversified portfolio.

Boeing offers a lesson on diversification

On 10 March, the Boeing 737 MAX aircraft flown by Ethiopian Airlines crashed near Addis Ababa, killing all 157 people on board. This comes less than 5 months since another Boeing 737 MAX aircraft plunged into the waters off of Indonesia. As investigators look to uncover root causes of these accidents, a growing number of aviation authorities around the world are grounding Boeing’s 737 MAX aircrafts. The debacle has sent Boeing’s share price down 14.8%, from $440 USD to $375.41 USD between 1 March and 12 March.

This example of a highly reputable company’s stock price plummeting with its planes goes to show the vagaries inherent with investing in single-name securities. Unexpected events can severely impact the value of a particular investment, negatively or positively. It’s not rare, and it’s unpredictable: for example, it happened last year to Facebook with Cambridge Analytica. The lesson investors can draw here is to have a diversified portfolio so they can sleep better not worrying about potential events within a company, such as plane crashes, a privacy scandal, a CEO affair, or about external impacts on a company, such as a sharp increase in oil prices.

Using what’s going on with Boeing to illustrate the importance of diversification, let’s compare the daily percentage change in the share price of Boeing against VTI, which is a Vanguard ETF that tracks the CRSP US Total Stock Market Index. The latter is a very broad representation of the universe of investable stocks in the US, and is made up of more than 3,500 companies. The benefit of diversification is very clear here: in Figure 1, we can observe that the swings in the Boeing stock price (orange line) can be as wide as +/- 7% per day. This volatility is significantly wider than that of the tracking ETF (blue line).

Figure 1 - Boeing (NYSE:BA) versus Vanguard Total Stock Market ETF (NYSEARCA:VTI)

Source: StashAway, Bloomberg

Beyond smoothing out price swings, diversification also mitigates the problem of being exposed to event risks, such as companies being delisted or going bankrupt. It is simply too onerous and complex for an investor to track and analyse a large number of single-name securities to find winners and avoid losers.

Diversification is also not about simply having a large number of securities in a portfolio. Things become significantly more interesting when an investor starts including different types of asset classes into their portfolios. An effectively diversified portfolio would be invested across geographies, and strikes a good balance of allocations to growth assets (e.g. technology stocks, etc) and protective assets (e.g. government bonds, high-grade corporate bonds, gold, etc).

The bears are defiant

Defying all negative expectations, growth-oriented assets have reversed their doldrums in late-2018, and