By Michael Donahoe, CFP®
Have you ever played roulette? If so, you likely bet on several numbers rather than pinning all your hopes on one and letting it ride. There’s nothing more daring than betting on a single number to win. Especially if you’ve got a decent chunk of money on the table, why risk it?
I know you’re familiar with the saying “Don’t put all your eggs in one basket,” so it shouldn’t come as a surprise that it’s important to diversify. Without diversification, we could miss out on new experiences, ideas, people, and places. Some enjoy taking risks and living large, while others prefer to play it safe. This also applies to your investment portfolio.
Diversification can help you offset risk and reach your goals with an added level of confidence. Even if your understanding of diversification is already solid, it’s helpful to review its benefits, and we’ll provide some examples for additional clarity.
Minimize 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, and real estate, etc.
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 give you 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 help 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. (1)
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.
Because of the unpredictability associated with short-term stock market success, diversification and investing according to when you need the money can help you reach your goal with more confidence when compared to putting all your eggs into one basket.
The Ideal Mix
Perfection is notoriously unattainable, so calling an investment mix “ideal” can feel like a loaded term. Everyone has their own unique goals, dreams, timelines, and risk capacity—what’s ideal for one may not be ideal for another. The closer you are to retirement, perhaps a more conservative mix is a better fit. Remember that portfolios can change with time; that’s the beauty of the stock market—you can change your portfolio as your goals evolve.
When it comes to investment decisions, it’s wise to meet with a financial advisor who can learn about your personal circumstances and tailor their advice to your specific financial goals.
Focused on building and sustaining your personal wealth through partnership, guidance, and education, we at Harvest Asset Group are committed to providing customized financial solutions that meet your needs.
If you’re looking to partner with an experienced advisor you can trust to put you first, set up a get-acquainted meeting to see if we’re a good fit. Call us at (207) 775-1151 or email us at info@harvestassetgroup.com, and you can also access our best financial insights and tips by signing up for our valued-packed newsletter. We look forward to hearing from you soon!
About Michael
Michael Donahoe is the founder and principal of Harvest Asset Group, LLC, an independent, fee-only financial planning and investment management advisory firm in Portland, Maine. Michael enjoyed a successful corporate career in marketing and sales before transitioning to the financial planning profession, founding his firm in 2012, where he now leads the client services team and serves as the firm’s chief compliance officer. Michael earned his MBA degree from George Washington University and completed his educational requirements to earn the CFP® mark of distinction at the University of California, Berkeley. He is a Fee-Only and NAPFA registered financial advisor, a designation which followed the completion of rigorous continuing education requirements. Michael has lived in the Portland area since relocating from San Francisco in 1995 to be closer to family. He is active in community affairs and spends his non-working time enjoying the natural beauty of Maine.
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(1) https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
