Building an investment portfolio can be a frightening thing. As you work with a financial advisor to allocate your dollars towards various investment prospects, there is always a game of tug-of-war between the possible risk and potential reward to consider—which is why building an investment portfolio that is diverse is so important.
A diversified portfolio is made up of assets that do not correlate with one another and of investments that are placed at different times, which is referred to as Dollar Cost Averaging. This means that the investments are not impacted the same way by economic events, and generally when one asset’s value goes down, the others within the portfolio may benefit or rise. For this reason, having a diversified portfolio is a fantastic way to protect against bear markets (downturns), market crashes or economic setbacks, because everything within the portfolio will be impacted differently by these events. By understanding what diversification means—and how to truly achieve it—you can better safeguard against risk while building a strong foundation for your financial future.
What is True Diversification in Investing?
Oftentimes, portfolios may appear to be diversified on the surface but will actually be made up of underlying holdings that are impacted in similar manners from market stress—this is what is called naive diversification. An example of this would be investing entirely in stocks, even if those stocks are non-U.S. companies. This may appear to be a diversified portfolio as it is made up of national and international holdings, but because market exposure can impact stocks on a global scale, it is still not a wise strategy.
True diversification refers to having a portfolio that is made up of a collection of assets with different economical drivers. A truly diversified portfolio will generally have a mix of U.S. and non-U.S. stocks, fixed income investments such as bonds, commodities such as oil or gold, and alternative investments such as real estate or cryptocurrencies. For the stocks you do pursue, make sure they are in varying industries such as travel, entertainment, and consumer goods, which are unlikely to be impacted by an economic downturn in the same way.
Why Should I Pursue True Diversification?
While there are ample amounts of time, money, and resources invested into studying and steadying the economy, it is still important to remember that downturns and all-out crashes are a distinct possibility. For those without diversified investments, these tumultuous periods can be entirely devastating to your savings plans. By building a truly diversified portfolio, you are able to hedge against economical risks and build investments that are more resilient to the inevitable rise and fall of the global economy.
What Assets Should I Hold On My Balance Sheet?
Fortunately, the list of assets you should hold on your balance sheet is actually quite simple:
- Fixed Income
- Guaranteed Contracts
- Real Estate
It’s important to remember that with these assets, your portfolio is going to have some give and some take. One area of your portfolio may be performing extremely well, while another may not be, but by diversifying your investments, you can be sure that overall, your investments are trending upwards consistently.
Are you ready to look into diversifying your investment portfolio? We would love to help. Contact us today to learn more about our personalized investment strategies and how we can boost your savings for the future.
Diversification does not guarantee profit or protect against market loss.