By Brett Gottlieb
We’ve all heard the expression “Don’t put all your eggs in one basket.” And if you’ve ever dipped your toe into the investment world, this is likely one of the first concepts you learned about: diversification. In fact, it’s one of the golden rules of investing. But why? It all comes down to managing risk.
Diversification can help you offset risk and reach your goals with an added level of confidence. Even if you already have a good understanding of diversification, it’s wise to review its importance and some examples to gain more clarity.
Diversifying your investments is a way of spreading the risk around so you are not locked into a few stocks that could make or break you. It’s increasing your odds against one asset tanking. Since the stock market is inherently volatile and unpredictable, diversification seeks to decrease your portfolio’s volatility and can help mitigate market risk.
One primary role of diversification is to minimize risk in the stock market. This doesn’t just mean diversifying between growth stocks and value stocks. True diversification requires incorporating a mix of different types of investments—think stocks, bonds, international investments, real estate, and others.
There are varying factors that govern the amount of risk you’re open to. If you are banking on your money being there for you on a certain date, it may align better with your financial plan to utilize a more conservative mix of investment assets with a history of lower volatility. Having a portfolio that is diversified with lower risk will help you find peace of mind.
As we mix and match asset classes and strategies, risk-capacity decisions need to be made no matter how long your timeline. By optimizing the way your portfolio is constructed, we can minimize risk and maximize returns
Increase Your Potential for Added Gains
Since its inception in 1926, the average return from the S&P 500 has been 10-11%. Learning a bit of stock market history often puts many at ease when deciding to move money from a savings account into the stock market.
Downturns and recessions are certain realities during one’s lifetime, but it’s the same reason many wealth managers suggest taking a long-term view on investing. Simply keeping your money in the stock market versus quickly buying and selling is a risk mitigation strategy of its own.
These downturns also pose new opportunities. Take our current global pandemic: 2020 created a unique window of opportunity. Certain high-growth investments performed exceptionally well as the economy reacted to COVID-19, while the brief drop in the market made some value investments available at deeply discounted prices. 2020 provides an example of how investments respond differently to economy-wide shifts, which underscores the importance of diversification as a hedge against long-term and short-term losses.
The Ideal Mix
First of all, “ideal mix” can be a loaded term, as everyone has their own goals, dreams, timelines, and risk capacity. A portfolio that works for one may not work for another. If proposed portfolio options make you break out in a sweat, a more conservative mix may be a better fit. Remember that portfolios can change with time; that’s the beauty of the stock market—you can adjust your portfolio as your goals evolve.
When it comes to investment decisions, it’s prudent to work with a financial advisor who can learn about your unique circumstances and tailor their solutions to your specific financial goals. To partner with an experienced professional who has your best interests in mind, email us at info@ComprehensiveAdvisor.com or call (760) 813-2125.
About Our Advisors
Brett Gottlieb is the founder of Comprehensive Advisor and a financial advisor with nearly two decades of industry experience. He graduated from California State University-Chico with two bachelor’s degrees in Business Administration and Economics. Brett is Life Insurance licensed in several states. He is passionate about guiding his clients on retirement income planning, helping each client pursue their specific retirement goals and defending the assets his clients have worked so hard to achieve. Brett is a California native and currently resides in San Elijo Hills with his beautiful wife and three children.
With a combined experience of over three decades in the financial services industry, our advisors hail from some of the largest independent broker/dealers and banking institutions in the country. They have dedicated their professional careers to creating personalized financial solutions for individuals and families who seek successful retirement planning and currently offer investment advisory services through AE Wealth Management, LLC. Our advisors take a common-sense approach to the planning process and work with clients to create a retirement road map to help ensure their assets are protected and they receive the income needed to enjoy their future. Based in Carlsbad, California, they work with clients throughout San Diego County and beyond. Learn more by connecting with Brett on LinkedIn or email them at info@comprehensiveAdvisor.com.
Investing involves risk, including the potential loss of principal. Any references to protection benefits, safety, security, lifetime income, etc. generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Neither the firm nor its representatives may give tax or legal advice. This material is intended to provide general information and is believed to be reliable, but accuracy and completeness cannot be guaranteed. Comprehensive Advisor, LLC is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Comprehensive Advisor, LLC are not affiliated companies. C.A. Financial & Insurance Services, CA Ins. Lic. #6000262. 1053049-9/21
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