There is an old, old saying – “Don’t put all your eggs in one basket!” This piece of advice is still perfectly applicable to the ever new, changing world of investing, because diversification reduces risk. By varying financial instruments, asset classes, companies, industries, geographical locations, etc., you are hedging against a singular event, or series of events, that would negatively impact all your holdings. There are many types of risk, and it may be cumbersome or more expensive to diversify, but in the end you might achieve your financial goals and still get a good night’s sleep.
Particular investments or asset classes may perform better than others over time due to factors like current market or economic conditions, interest rates, currency markets, international factors etc. Diversification does not prevent loss, instead it seeks to have one investment offset the decline of another. A popular form of diversification is asset allocation. By having a fair representation of stocks and bonds in your portfolio, you lessen risk because these assets generally react inversely to events. Your portfolio might be further diversified by the inclusion of cash, real estate, gold and other commodities.
Spreading your investments across varying asset classes makes sense in order to protect against the risk of betting on a single sector like technology or pharma, or a single stock within it. Think “Boeing” or “Biogen.” A smart solution might be to examine mutual funds which are made up of groups of stocks, bonds, municipals and government treasuries, and are diversified by their very nature. Mutual funds’ risk varies widely from blue-chip conservative to highly speculative, but they give individual investors a breadth that would be hard to duplicate. Money market funds are a type of mutual fund that invests in safe securities and low risk short term debt, its focus is on preserving principal. Expense ratios are low for money market funds because they are not actively managed like mutual funds.
Remember to consider your financial goals and current reality in any investment decisions. The best outcome for someone in the wealth accumulation phase of life who is looking for growth will be very different from the person looking to preserve capital because they are close to retirement and need to protect their savings.
Contact Us: There are no guarantees in life, but diversifying your investments will greatly reduce the volatility of your portfolio over time. There are many investment strategies that can help you do this. Be sure to pick the one that works with your budget and risk tolerance level, because even a well diversified portfolio is not a guarantee against loss or a promise of profit. Feel free to contact me, Cory Lyon, directly at 561-209-1120, if you need to reexamine your investment portfolio for diversification. At TFG Financial, we believe in customized investment strategies and personalized asset management. I act as a fiduciary for all my clients.
TFG Financial Advisors, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.
