Portfolio diversification and why it’s important
What goes up must also come down. That’s true of Newton’s apples, your favorite wooden roller coaster, and — inevitably — the stock market.
Of course, different investors handle market ups and downs differently. Some are up for riding the drops like a coaster aficionado while others cling to the handlebars, wishing for a smoother ride. Whether you’re former or latter — or, more likely, somewhere in between — there is a way to build an investment portfolio that hews more closely to your personal risk tolerance level.
In short, you likely need to diversify your portfolio.
What is portfolio diversification?
Portfolio diversification is creating synergy between different types of investments — such as stocks, bonds, and real estate — in one’s portfolio.
Different asset types tend to move in different cycles. Stock market in a swoon? Good thing your bond or real estate holdings are holding steady or even on the ascent. Or vice versa.
This strategy essentially spreads risk, which can decrease how dramatically you experience a market downturn.
How to plot a portfolio diversification strategy
How a given investor ultimately allocates his or her assets should be guided by a series of personal, interrelated elements—i.e., short- and long-term goals, resources and assets on hand, debt to income ratio, investment time horizon and personal risk tolerance level.
In other words, there is no one-size-fits-all portfolio diversification strategy. Yes, there is an overarching shared goal—minimize risk, maximize profit—but the path will be different for everyone.
The portfolio of an investor two years out from retirement, for example, probably should not resemble that of a millennial just beginning to seriously explore market options, a parent saving for a child’s college education, or a couple saving for a down payment on a first home.
The more conservative an asset allocation strategy, the less potential for capital gain, but for some investors, the peace of mind that comes from less exposure to volatility carries its own value.
Portfolio diversification is about more than allocations in your portfolio, however: It’s about mindset. It’s about understanding on a fundamental level that you are under no obligation to hammer the round peg of your financial needs and goals into a square hole investment strategy: There are not only a myriad of vehicles from which to choose—large-, mid-, small-cap stocks; annuities; mutual funds; et cetera—but also many potential ways to combine them.
You’re not alone
Nevertheless, for a layperson, all of this can be more than a bit difficult to navigate.
The good news? You need not go it alone.
As you look at your own unique mix of resources, needs, and goals there are seasoned financial professionals who can help walk you through equally unique potential investment strategies to meet them with as little stress—and as much efficiency—as possible.
So don’t hesitate to reach out. You’ll get a knowledgeable outside perspective on your financial life and learn more about both the tried-and-true, the cutting edge, and everything in between. You’ll find out how to hone and bolster what’s working—and how to reimagine and revamp what isn’t.
Remember, the market is always in flux, always changing, always evolving. Much like your life. It only makes sense in that context to maintain a similarly agile investment strategy.