Managing your investments can be an overwhelming process. Losing sleep worrying over what the stock market is doing can be a lifestyle for some, but it doesn’t have to be. A diversified portfolio can help to cut down on risk while still offering returns.
What Do We Mean When We Talk About Diversification?
Investment diversification refers to a process of allocating your capital to a variety of different asset classes that reduces your chance of loss in one specific category. Think of it this way. If you invested all your money in a coffee chain and suddenly that coffee chain received a great deal of negative media attention, their stock would likely suffer along with your investment. However, if you’d also invested in their competitor, you might’ve seen a balance in the investment as the competitor would receive business from the original coffee chain.
When it comes to wealth management, we’re talking about something more complex than simply investing in businesses that compete or complement each other during a market change. In order to diversify your portfolio, you must look at investments outside of the same asset class. An asset class usually falls into the three main categories: equities or stocks, fixed income or bonds, and cash equities. Real estate, commodities and cryptocurrencies are other forms of asset classes.
A well-diversified portfolio should have investments across a few different asset categories. That way, if one experiences a loss or dip, ideally, other investment mediums will continue on an upward or, at least, level trajectory.
When we think of stocks and bonds, historically, they’ve always been opposites. When one is rising in value, the other is experiencing a loss. When you invest in both asset classes, you likely won’t experience such harsh losses. Think of it as a frozen pond. If you walk across the pond with stilettos on, your chances of cracking the ice are pretty high. If, however, you spread your weight out, you evenly distribute the pressure and lower your chance of ending up in some pretty cold water.
Although diversifying your portfolio won’t prevent loss, it’ll mitigate the loss by reducing the effects of volatility in each respective market. The idea of balancing the risk and the return when it comes to wealth management is something all investors should be thinking about. What is your risk tolerance? This is one of the most important questions. No investment offers guaranteed returns at guaranteed milestones.
If you don’t know what your risk tolerance is, you should get in touch with a qualified advisor. An advisor can help you learn about your comfort levels and a diversification strategy that works for you.
Never underestimate the value of investing in real estate when it comes to your investment portfolio. Get in touch with Jordan Fairlie to see how we can help you diversify your portfolio.