The Art of Portfolio Diversification: Your Best Defense
16 Jul 2019
While portfolio diversification isn’t a new concept, it’s a vital one for a myriad of assets that earn the highest returns with the lowest risk.
Defense wins championships, or so the old American sports adage goes. For your money, investing defensively will help you become champion of your financial goals.
In less poetic terms, I mean that defensive investment moves like portfolio diversification help to mitigate the possibility of a major loss in your investments and up the chances of getting what you want out of your money.
Fact: signs of another seismic shake-up in the economy are starting to appear, especially with the dipole of expert optimism and consumer pessimism in the state of the economy.
No matter the nature or size of your investments, diversifying your portfolio will help mitigate topsy-turvy economic conditions down the road.
Here we go…
Understanding Portfolio Diversification
The keyword here (obviously) is diversification, adding variance where there previously wasn’t any.
The diversity can come in a few different areas.
The Financial Industry Regulatory Authority, a nonprofit that polices all registered broker-dealer firms and registered brokers in the U.S., lays out a nice list of common investment types. Here are a few of them:
- Stocks — an ownership stake in part of a company;
- Bonds — a segment of what is, essentially, a publicly funded loan;
- Investment funds — money from groups of investors that are managed by professionals based on certain investment strategies;
- Bank products — a promise to receive a certain amount from a bank as it manages money;
- Options — the right to buy or sell a certain amount of shares under certain conditions;
- Commodity and Security Futures — the agreement to sell or buy certain amounts of stuff or certain securities at some point in the future.
Diversity in investment means having money in a wide range of these kinds of arrangements.
Speaking in general terms, you can expect some fairly consistent facts from these types of investment. Stocks tend to be more volatile, meaning their value is more readily apt to increase or decrease.
Another example is bank products and bonds being more stable and likely to bring a predictable return. The seller of the bond or bank product often commits to paying back a certain percentage more than what you paid them.
Diversity Is Not Equality in Investing
Simply having different types of investments in not diversity at work. Splitting your money five ways across five investment types won’t do you any good if you’ve bought into just one opportunity in each investment type.
Finding a variety of options within each investment type will help you ensure, at least, that certain investments increase in value as other head the other direction.
Also, how much money you want to make in a certain time frame and your risk tolerance dictate where you should put your money.
To get the most of this very specific effort, consider retaining financial planner to help you understand where these needs lie.
We Can Help with That Last Part
Solera Asset Managers can get you going today with a plan tailored to you and your needs online today. We will ask you some questions to figure out what you need, walk you through funding your account and then run the show from there.
We’ll take care of the details like rebalancing the portfolio diversity in a tax-efficient manner.
Let us help you get with your financial and investment goals.