Suppose your parents invested in a thriving company’s stock – like Coca-Cola, Apple, or Amazon – and profited tremendously from these investments. At the same time, perhaps their friends put all their money into a different company’s stock – and that company abruptly went bankrupt. While your parents likely made considerable money from their investment, their friends lost everything they’d invested. The old adage “don’t put all your eggs in one basket” certainly applies here, as it’s risky to put all your money into one type of investment. No one knows how any individual stock, for instance, will perform over the short- or long-term, and we have no guarantee that any one investment will perform well. That’s why diversification is so important.
When an investor diversifies, they spread their money across a variety of investments and types of assets, such as stocks, bonds, mutual funds, CDs, real estate, insurance products, etc. If you put all your money in one “basket” – such as investing only in one company’s stock – and it underperforms, you could lose significant money. As we’ve seen in recent years, a variety of factors (the pandemic, the 9/11 terrorist attacks, a change in administration) can impact the economy – and our personal investments.
Diversifying your portfolio, however, spreads your money across multiple asset classes. That way, if one investment drops in value, the others can help offset these losses, setting you up for long-term financial flexibility and growth. In other words, with a diversified strategy, even if you lose money in the stock market, you’ve also invested elsewhere, helping to balance out any potential losses. This creates tremendous flexibility in your plan.
To develop a diversified portfolio, you may want to invest in a combination of these types of assets:
- Stocks can potentially provide the highest return over time, but can fluctuate dramatically in the short term, due to market volatility.
- Bonds may offer steadier returns, but can vary as interest rates fluctuate.
- Mutual funds allow investors to instantly diversify, investing across dozens (ormore) stocks, bonds, or other securities. Historically, these large groups of diversified stocks tend to perform better – despite market volatility – vs. individual stocks.
- CDs and savings accounts typically don’t fluctuate in value, growing steadily based on interest rates.
- Real estate values may grow over time, and can offer additional income streams, but it can be expensive and time-consuming to maintain real estate.
- Insurance products are uncorrelated to the market, income guarantees, and death benefits.
In short, while diversification does not guarantee profit or protect against market loss, it may help you better tolerate market fluctuations and increase the chances you’ll reach your long-term financial goals.
Develop a diversification strategy. There’s no “one-size-fits-all” approach to building wealth or developing a successful diversification strategy since each person’s circumstances, goals, and risk tolerance are different. Therefore, it’s essential to create a customized plan to meet your individual needs. To accomplish this:
Assess your situation: Consider your age, financial goals, income, debt, risk tolerance, etc. For instance, someone just starting out in their career may be more risk-tolerant than someone who is approaching retirement age and has less time to wait for their money to grow.
Work with a qualified financial advisor. A qualified financial advisor, such as the professionals at Guyton Forge, can help guide you to diversify your portfolio based on your personal facts and circumstances.
Consider your risk tolerance. If you have a high risk tolerance, you might opt to invest most of your money in stocks (which have the potential to grow dramatically but also have the potential to drop dramatically) and less in other asset classes. Stocks tend to offer higher expected returns over time, but the downside is that they can be volatile in the short-term, with performance swings that can make more conservative investors nervous.
Someone with a more moderate risk tolerance might want to put more money intostocks than other assets, but balance it out with robust investments in other commodities and assets.
A conservative investor – perhaps nearing retirement age or not having the stomach for the ebbs and flows of the stock market – might allocate money more evenly between stocks, bonds, and other assets. Investing in bonds, for instance, may provide more stability but with lower long-term returns.
Regardless of your risk tolerance, it’s important to balance higher-risk assets (like stocks) and lower-risk assets (like bonds), allowing your portfolio to grow while protecting you from market volatility and short-term drops in value. You’ll appreciate the feeling of financial stability, and having a balanced, diversified portfolio may help you sleep better at night.
Finally, it’s important to compare your asset allocation to your portfolio periodically in order to be sure they’re aligned.
Regularly (at least annually) review your assets and their performance. Market fluctuations, shifts in the economy, and changes in your own personal circumstances(e.g., the death of your spouse, birth of a child, loss of a job) may require you to adjust your portfolio to accommodate your new reality. Determine which assets are performing well over time –and which are underperforming – and adjust accordingly. Periodically review and rebalance your portfolio to increase your wealth, control risks, and remainaligned with your long-term goals.
Ready to diversify your portfolio? Let’s talk. The award-winning Guyton Forge team is here to help you achieve – and potentially exceed! – your financial goals. The Guyton Forge team has won numerous awards for their exemplary service and knowledge. Most recently, Joseph Guyton, Owner The Guyton Group, earned the prestigious designation of Five Star Wealth Manager* for the seventh time. To earn the Five Star Wealth Manager award, wealth managers must demonstrate that they provide the highest-quality services to their clients. Additionally, Joe and his son Andrew Guyton, Founder of Forge Financial, have each (repeatedly!) earned the prominent designation of President’s Council Qualifier, a Guardian award for financial professionals that provide exceptional customer service and nurture long-term client relationships.
At Guyton-Forge, we offer the experience of a big firm with a small-town feel. We customize our approach (and our advice) to meet each client’s specific situation, needs, and goals. We’re proud to do things differently – it’s part of what sets us apart as a friendly, high touch practice. We offer extensive experience and knowledge, creating strong, long-term relationships with our clients.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 160 GOULD STREET, SUITE 310, NEEDHAM MA, 02494, 781-4494402. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. Guyton-Forge is not an affiliate or subsidiary of PAS or Guardian. Life insurance offered through The Bulfinch Group Insurance Agency, LLC, an affiliate of The Bulfinch Group, LLC. The Bulfinch Group, LLC is not licensed to sell insurance. CA Insurance License Number – 0A96200. Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. 7383196.3 Exp 2/27
* This award is not issued or endorsed by Guardian or its subsidiaries. The annual Five Star Manager award is based on criteria developed and obtained by Five Star Professional. No compensation has been provided by the adviser in connection with obtaining or using the third-party award.
