The saying “don’t put all your eggs in one basket” defines diversification in investment advisory. It is this wisdom, perhaps passed from one’s parents, of not putting everything you have in one choice that should absolutely be followed in investing.
Through diversifying your investments, you have a greater probability of capturing investment opportunities over the long-term, while at the same time helping to minimize those concentrated risks of being overly exposed to any particular investment in the short run.
Investors do not like to think of periods when the market is in a recession, but during recessionary cycles, diversification may limit your exposure to market loss. For example, during 2008, the stock market performed poorly while treasury bonds performed positively. The opposite may be true during a bull market. For this reason, you want investment vehicles in your portfolio that may perform well during all market cycles.
Diversification allows one to reduce portfolio volatility, as it is volatility that makes investments move like a roller coaster. Volatility, for some, is what makes investing difficult and invites emotion to cloud the logical process of investing.
Diversifying investments into buckets (including U.S Stocks, International Stocks, Domestic Bonds, and International Bonds), aids the investment process by dampening volatility because typically all asset classes do not move in unison. Put simply, diversification allows for your portfolio to have a smoother ride. It is through the process of diversification that you can match your capital need and investment goals. For example, you can invest in CDs and bonds for capital you know you’ll need in one to two years, while the stock component of your portfolio can be for the capital you’ll need in the next decade. Everyone will have a different asset mix or diversify differently.
However, we believe every portfolio should have broad enough exposure to capitalize on the opportunities available in the financial markets. These opportunities come in the form of:
The act of diversifying requires financial planners, like those at Geier Asset Management, to examine your entire financial profile and find the allocation that best meets your objectives. Lastly, diversification requires your portfolio to be flexible enough to reallocate and rebalance so as to not be too underweight or overweight in any one sector or strategy.
Have questions about diversifying your portfolio? Contact Geier Asset Management to speak with an advisor.