Investing can be one of the best ways to build wealth and reach your long-term financial goals. The most common saying we hear is “never put all your eggs in one basket” and the moral holds true. No matter what your goal is, diversification is the key to investing.
Why Diversify?
The primary goal of diversification is to spread out your risk so that the performance of one investment doesn’t necessarily correlate to the performance of your entire portfolio.*
Recently, we have seen the downside risk of concentrated stock positions. There are plenty of high-growth stocks that have entered generational bear markets, down anywhere from 70-90% from all-time highs.
You don’t want the success of your investment portfolio to hinge on a single company.
The goal is to achieve sustainable growth over the long-term while mitigating your risk (and losses) through over-exposure to any one asset. You may not pick the next high-flying investment but at least you won’t jeopardize your retirement fund.
If you are the type who likes to gamble or play around in the stock market; do it. There’s no problem to have a small portion of your investable assets in a play account. Just don’t bet the house with a high-risk strategy.
How to Diversify Your Portfolio
One mistake I see investors make is owning multiple funds that basically hold the same thing. Having more funds in your portfolio doesn’t mean you are properly diversified. Here are some ways to avoid this:
- Invest in companies across different stock market sectors
- Invest in companies of different sizes (large-cap, mid-cap, and small-cap)
- Invest in both domestic and international stocks
Another common mistake investors make is owning too much of their company stock. Once stock options are exercised or awards are vested, look for opportunities to diversify your portfolio. In general, no more than 10 percent of your net worth should be in employer stock.
When it comes to your bond investments, consider varying maturities, credit qualities, and durations.
Bottom Line
Remember that the appropriate level of diversification for you also depends on your financial goals, your time horizon, and your risk tolerance. Chasing high returns can be addictive, but it pays to be patient and diversify.
If you would like a second opinion on your portfolio, please don’t hesitate to reach out.
George Maroudas
847-550-6100
george@pmgwealth.com
Twitter @ChicagoAdvisor
Sources and Disclaimers:
Stock percent off high chart from YCharts.
Guide to Diversification from Fidelity
*There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. PL Financial doesn’t provide research on individual equities.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The prices of small and mid-cap stocks are generally more volatile than large cap stocks.
Investing in mutual funds involves risk, including possible loss of principal. Fund value will fluctuate with market conditions and it mav not achieve its investment objective.
