What's Up(Or Down) with the Market? A Reminder About the Importance of a Diversified Portfolio
The markets have seen a rough start to 2022. Inflation, a potential tech bubble, foreign tensions, the list goes on. When events like these hit the news, it's natural to wonder how that could impact you and your investments. Should you be concerned, or is your portfolio prepared for unexpected changes? If you're still wondering whether or not to adjust your portfolio based on current events, speak with your investment advisor first, as they can help determine what may be best for addressing your long-term financial goals.
When it comes to diversifying your investment portfolio, it’s important to understand why diversification is one of the building blocks of a well-built portfolio. While diversification is important at any risk level, you want to make sure you taking on enough risk to meet your long-term financial goals. Risk and reward go hand in hand, and it's impossible to achieve a high sustainable level of return without the proper amount of risk. Conversely, one who wants to stay away from the risk of an aggressive portfolio should expect to see a lower level of return in exchange for lower risk. While risk is something to be monitored, it is not something to be afraid of. When properly diversified, a portfolio will be able provide an investor with a reasonable expectation of return while minimizing the level of risk that needs to be taken.
Benefits of Diversifying Your Portfolio
As mentioned previously, reducing risk is one of the key reasons to diversify your portfolio. While risk can’t be eliminated entirely, diversifying your portfolio can help you manage your overall level of risk and minimize your chances of losing large sums of money over time. When you don’t diversify among various asset classes, you become even more exposed to market risk.
To go along with reducing risk, diversification also allows you to hedge your portfolio, which is an automatic benefit of refraining from putting all of your eggs in one basket. By investing in a variety of sectors, you even out your chances of getting positive and negative returns, as opposed to purely negative.
Capital preservation is another benefit of diversification. Instead of focusing on your rate of return, capital preservation is all about protecting the money you already have. Because diversification involves investing in a variety of stocks, bonds, mutual funds, real estate, and other alternatives, it makes it easier to protect the wealth you’ve already saved and accumulated.
When it comes to proper diversification, it’s important to allocate your money according to valuation, not some overly-hyped Wall Street formula or social popularity(remember Game Stop?) You also want to make sure you're not just holding the same kind of investment with different names(i.e. holding five different tech companies does not constitute a diversified portfolio). Holding various asset classes, types, sectors, industries, and geographies all contribute to a properly diversified portfolio.
Still unsure what this all means? Check out this chart for a visual on how diversification works in your favor over the long-term.
If you're still feeling nervous or anxious about these events or the market in general, schedule a call with us to discuss your options and how to manage through times like these. In case you missed it, you can also check our latest market commentary here for more information on what happened in the market last quarter.
Market downturns, ugh! Can't we just go back to Bible times where they didn't have to worry about all this negative news, the stock market and all this financial mess? Let's take a step back for a minute. Ever heard of the famines that Israel had to deal with? How about the plagues that came before the Israelites left Egypt? Locust, hail, livestock pestilence - there were plenty of events that caused loss and a lot of stress!
The phrase "there is nothing new under the sun" certainly applies here. Even though our currency, technology and how we evaluate wealth may have changed since Bible times, the concept of diversification and disciplined investing still applies. David had wise words of wisdom when it came to dealing with hard times: "Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land." Ecclesiastes 11:22. When we are prudent and wise enough to realize that investing is not always a straight line upward, the more we stack the deck in our favor and set ourselves up for success. Though it may not seem like it at the moment, maintaining a properly diversified portfolio now will lead to better days ahead.
Evergreen Financial Group is a Fee-Only Financial Planning and Investment Firm located in Billings, MT serving clients in Montana, Wyoming and virtually across the country. Evergreen Financial Group specializes in working with Christian families, including young professionals, Current and Future Retirees and Church Staff Members.
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