The Importance of Diversification in Your Investment Portfolio
By Shared Vision Wealth
October 2, 2023
Achieving investment returns entails taking on risk. With great risk comes great reward. But what if you could mitigate risk, achieve financial stability, and create more consistency with your investment results while simultaneously growing your investment returns? Diversification is a strategic way to do precisely that.
While diversifying your investment portfolio does not guarantee protection against loss, it is one way to reduce the odds.
What is Diversification?
In simple terms, diversification means not putting all your eggs in one basket—or spreading your investments across a range of assets or asset classes to reduce risk and potentially improve returns.
Most assets respond to market conditions differently. So when one performs poorly, another may remain strong, helping mitigate loss. Asset categories may include:
- Stocks: Shares in different companies across various industries.
- Bonds: Fixed-income securities with varying maturities and credit ratings.
- Real Estate: Properties, Real Estate Investment Trusts (REITs), or real estate funds.
- Cash or Equivalents: Money market funds, certificates of deposit (CDs), or treasury bills.
- Commodities: Physical goods like gold, oil, or agricultural products.
Why Diversify Across Industries
Diversifying across industries is a fundamental investment strategy, and here’s why:
Each industry generally performs differently under various economic conditions. When one faces a downturn, another may flourish.
Focusing on a single industry leaves you vulnerable to concentrated risk. On the other hand, diversifying can allow your investments to flex with various economic conditions. When one industry suffers during an economic downturn, you could be poised to capture growth in another.
Why Diversify Across Companies
Diversifying across companies, not just industries, is also crucial. Why?
While many companies belong to the same industry, each organization performs differently. Company-specific factors like management quality, financial health, innovation, and market competition can significantly impact any company’s performance.
It's also worth noting that some companies may offer quick growth potential but come with higher risk profiles, while others opt for moderate growth and carry lower risks. Diversifying across companies ensures you capture opportunities while minimizing risk.
Why Diversify Across Asset Classes?
Investing across different asset classes (stock, bonds, real estate, etc.) is also critical. Across different companies and industries, each asset class has a unique risk-return profile. By diversifying across classes, you may spread risk.
For example, imagine an investor concentrating their entire portfolio in technology stocks. While tech stocks can offer significant growth during economic upswings, they are also prone to high downside risk during an economic downturn.
Had the investor spread money across a diversified portfolio of stocks, bonds, and real estate, their portfolio may have experienced less volatility.
Why Diversify Internationally?
Different countries face unique geopolitical and economic risks and are susceptible to exchange rate fluctuations. Investing across borders mayreduce exposure to economic and financial instability, regulatory changes, unfavorable currency movements, and market shocks that can impact a single economy while leaving others relatively unaffected.
Ready to Take Charge of Your Financial Future?
Whether you're looking to plan for retirement, diversify your investments, or build more financial security, the experienced advisors at Shared Vision can help. Contact us today, and let's begin building your financial success together!
This material is for informational purposes only and is not a recommendation or advice for your individual portfolio. All investing involves risk, including the possible loss of principal. Diversification does not guarantee a profit or protect against a loss. International markets are subject to additional currency risk and geopolitical risks including political, financial, or natural disasters that may adversely affect the value of securities in those markets. These risks are especially high in emerging markets.
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