Is Your Portfolio Diversified Enough?
You’re working hard to build a strong financial future, and that’s fantastic!
But have you ever stopped to consider if your investment portfolio is truly balanced? Think of it like a delicious pie; would you want one made with only one ingredient? Probably not!
Our latest video discusses the essential concept of diversification and why it’s your secret ingredient for a resilient and thriving portfolio.
Learn how spreading your investments across different areas can help you weather market ups and downs and ultimately reach your financial goals with greater confidence.
Transcript
Hi, I'm Lindsay Adams, a lead financial advisor at CGN Advisors. Like many of my clients, I imagine you're working hard, saving diligently, and building a portfolio for your future. And that's great. But today I want to talk about something that could significantly impact your financial future. Is your portfolio really diversified enough?
Why Investment Diversification Matters
Let's start with a simple metaphor. Diversification is like planting a garden with a variety of flowers. Each one may bloom at different times, but together they create a more vibrant and resilient landscape.
Diversification means spreading your investments across different asset classes, industries, and even geographies. But it goes deeper than that.
Using Diversification as a Financial Safety Net
Think of it as your personal financial safety net, protecting you against the what-ifs of the market. So why is this so important? Imagine putting all of your eggs in one basket, and if that basket falls, you lose everything. The same applies to investments.
Spreading Risk Across Asset Types
But when your investments are spread across multiple types, such as stocks, bonds, commodities, cash and cash equivalents, mutual funds and ETFs, real estate, and even sectors like technology, healthcare, energy, and more, you reduce the risk that any one bad event or downturn wipes out your entire portfolio. And that's because different investments respond differently to economic events.
When stocks go down, bonds might hold steady or even rise. When one sector struggles, another may shine.
Avoiding Overexposure to a Single Sector
For example, you might own a dozen different technology companies, but if tech hits a rough patch, your whole portfolio could still be at risk. By spreading investments across tech, healthcare, consumer goods, and others, you better protect your wealth.
Diversification for Market Volatility
Think of diversification as your shield against the unexpected. Even the most seasoned investors can't predict which part of the market will perform best year after year.
A diversified portfolio can potentially help smooth the ups and downs, so you're less likely to panic during downturns.
Drawing Income from a Diversified Portfolio
If you're retired and need to draw income from your investments, diversification can help reduce the likelihood that you'll need to sell a single investment at a loss during volatile markets.
As your life changes—retirement, sending kids to college, starting a business—diversification allows you to adjust your strategy without starting over from scratch.
Real-Life Example: Too Much Company Stock
Here's an example of not being diversified enough that I see all the time. Many of our clients work for well-established companies. It's natural to feel a strong connection to the company that you work for. You believe in its mission, you see its potential, and you might even get discounted stock options or grants.
While owning stock in a company you believe in can be part of your portfolio, it's important to understand the inherent risks of having all your funds tied to a single entity. Your financial well-being is reliant on a single factor that's completely out of your control.
Think about it. If your income is completely linked to your company, including your investments, and your company faces financial difficulties, you could potentially lose your job and simultaneously see the value of your portfolio take a nosedive. That's a double whammy you absolutely want to avoid.
Diversification limits your exposure to the ups and downs of any one company or industry.
Evolving Your Diversification Strategy Over Time
It's not a one-and-done task. As your goals, income, and time horizon change, so should your diversification strategy.For example, young professionals may favor more stocks for growth with some bonds for balance.If you're nearing retirement, you might shift toward income-generating assets and safer investments, but you still need a mix to outpace inflation.
When you're planning for goals like college, a major purchase, or charitable giving, each one may benefit from having its own diversified bucket.
Work with a Financial Advisor on Diversification
If you're unsure about your portfolio's diversification, now is the time to consult a professional financial advisor.
Interested in scheduling a meeting? Call our Manhattan, Kansas office at 785-340-3434 or our Rogers, Arkansas office at 479-335-1034. We look forward to speaking with you.