When it comes to creating an investment portfolio to help you maintain your quality of life during retirement, most experts agree that diversification is a good option. But what does it mean to diversify your investments? Let’s break it down.
Diversification means achieving balance
Fundamentally, diversification means balancing the investments you have in your portfolio so that – in a given economic situation – they don’t all go up or go down together. The term correlation is used to describe how one type of investment behaves in relation to another.
Imagine two companies, one called Suntan Lotion, Inc. and the other, Sunglasses, Inc. Sales at both companies would go up when it’s sunny and down when it rains. So, the value of both investments rises and falls in the same cycle. They’re positively correlated.
Now let’s introduce another company called Umbrellas, Inc. Unlike the other two companies, this company’s sales go up when it rains and down when the sun shines. They’re negatively correlated.
By substituting Umbrellas, Inc. for Sunglasses, Inc., we show how negative correlation helps diversify a portfolio. Our portfolio now contains companies representing different types of investments with different behavior. This illustrates the principle of diversification.
Remember that diversification does not ensure a profit or protect against a loss from a market downturn. Investment involves risk including possible loss of principal.
As a participant in a Lehigh Valley Health Network retirement plan, you have the opportunity to choose how your contributions are invested.
Your asset allocation should reflect your personal goals and investment preferences. Each person’s situation is unique. It is important to choose investment options that are most appropriate for you based off goals, time horizon and risk.
RO 2769331 (4/2023)