Diversification: One of many ingredients in your investment portfolio
iversification, as it relates to investments, can be defined as the process of asset allocating and utilizing various financial vehicles across different asset classes, industries, regions, and investment vehicles. The goal? In part, the goal of diversification is to reduce risk and maximize returns by investing in different areas that have low correlation to one another. In other words, when one investment zigs, the other might zag.
Regardless of the specifics and nitty gritty of how you diversify, a balanced approach can assist in smoothing out the ups and downs of volatility, and potentially delivering positive returns in one category while another category might be lagging behind. Just as we could have a few years of global synchronized growth, there could also be a specific asset class that lags behind and isn’t leading the charge.
We believe it is prudent for a financial advisor to provide a balanced approach to investing by diversifying across multiple asset classes while keeping your risk tolerance, goals, time horizon, investment experience and values in mind.
Over the years, we have seen periods of growth and expansion, as well as periods of decline and recession. It is natural that during times of growth, we may feel compelled to drastically adjust our portfolios to participate in an upswing. And the same goes for downturns. Such times can be an overwhelming, emotional experience where one may feel compelled to liquidate out of certain asset classes, and participate in a “flight to quality” or transition out of equities. This behavior is why we believe diversification is a key ingredient in portfolio management. A diversified approach allows for pieces of your portfolio to participate in an upswing or provide protection when the reverse happens and there is a decline. We believe that a portfolio should strive to be well built and well balanced so it can weather changes in various market conditions.
Of course, we understand that every investor has a unique set of circumstances that requires careful planning and management. As earlier stated, your risk tolerance and financial means are an essential ingredient that can dictate how you are asset allocated. We believe it is important that you feel comfortable asking questions about how you are allocated. Feel free to reach out to us if you have any questions about your unique situation and investment accounts.