Fidelity: Diversification Should Be Top Focus in 2018

January 2, 2018 — 4:20 PM EST

The financial markets are expected to start 2018 with positive momentum and little chance of a recession on the horizon. Still, with the business expansion cycle becoming more mature, investors should be focused on diversification when it comes to their investment strategy.

That's according to Fidelity Investments, which said in a recent blog post that, as the business cycle enters the mature stage of expansion, there is more chance of downside risk, making diversification more important. "Using historical patterns as a guide, the performance of a diversified portfolio beginning in the mid-cycle phase typically experiences steadier, positive returns over the subsequent three- and five-year periods," wrote Fidelity. "If the performance of the same portfolio begins in the late-cycle phase, there is a broader range of return possibilities and a generally less attractive risk-reward profile."

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On top of a maturing U.S. business cycle, there are expectations for more monetary tightening on a global basis in 2018 that could affect stocks. What's more, Fidelity said that "elevated" valuations across most asset categories imply that all of the positive news is already baked into share prices. While the markets shrugged off geopolitical risks in 2017, issues with North Korea and its pursuit of long-range nuclear missiles could add to uncertainty in 2018. Fidelity also pointed to the potential for protectionist policies as another risk to the markets in 2018.

What's ahead in 2018?

"As a result, our cyclical asset allocation view is to prioritize diversification in order to guard against the increasing uncertainty of outcomes and potential pickup in volatility that we expect during the course of 2018," wrote Fidelity. "Within the context of smaller cyclical tilts, we remain favorably disposed toward international equities and inflation-resistant assets."

Fidelity's warning about the need to stay diversified in 2018 comes as the fund manager is seeing a decline in financial New Year's resolutions. While that in and of itself isn't something to be concerned about, with the stock market in the ninth year of a bull run, the number of people making financial resolutions for 2018 is at an all-time low in Fidelity's ninth annual New Year's Financial Resolutions Study. While the reasons for a lack of financial resolutions vary, a sense of inertia appears to have set in, with many investors less worried about their portfolio than they are about other areas of their lives.

"There's a bit of a feeling that I had my financial resolutions for a couple of years when the market wasn't so great, but now that's not my primary focus," said Maura Cassidy, Fidelity vice president, retirement, in an interview with Investopedia. "The actions put in place in the last couple of years are allowing them to skip a year of financial resolutions."